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This is a basic guide that tells investors how to invest in ETFs.
ETFs, or "exchange-traded funds," are relatively new investment vehicles that are rapidly gaining in popularity. The exchange-traded fund industry hit another record in the first quarter of 2014 with $1.73 trillion in assets.
In this article, we will discuss how to invest in ETFs with confidence so that even the most inexperienced investor reaps the benefits of this unique type of fund.
How To Invest In ETFs: What is an ETF?
Simply stated, an ETF is a fund that is comprised of a group of stocks from a common niche, like energy.
ETFs behave in a fashion similar to mutual funds except, unlike mutual funds, they can be traded in the same manner as stocks. Mutual funds must be bought or sold at day's end and at the net asset value (NAV) of the funds' stocks, whereas ETFs can be traded at any time during the day.
Additionally, like stocks, ETFs can be sold short, bought on a margin, etc. These stock-like attributes are not available with mutual funds.
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ETFs are structured to track movement, and the structure is stated in the fund's strategy. For example, some energy ETFs track specific energy-related indices . This makes it easy for investors to track their own funds without the need to rely on the services of a fund manager and pay the associated fees.
An example of this type of movement-tracking fund is Direxion Daily Natural Gas Related Bull 3X Shares (GASL). GASL tracks the ISE-REVERE Natural Gas index with a strategy of daily investment results equal to 300% of performance of that index.
Now, with the basics in mind of what an ETF is, here's how to invest in ETFs.
How to Invest In ETFs: Start With These Simple Steps
In order to invest in an exchange-traded fund, you need to acquire the services of a broker. There are online brokerage firms that offer this type of service for a relatively low fee. Keep in mind that brokerage firms differ greatly from fund managers. While mutual funds require the services of a fund manager, ETFs are typically better in cost savings because they do not.
There are more than 900 ETFs currently on domestic exchanges and tied to a multitude of indices. Some indices are rather broad, such as the Standard & Poor's 500, while others, such as GASL, follow a narrower index.
Once an investor is comfortable with how to invest in ETFs, it's not atypical to add multiple funds to a portfolio for greater diversity and tracking in different sectors.
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