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What is an ETF? Everything you need to know

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If you’re just getting into investing, props to you—you’re clearly ready to start laying the groundwork for future financial success. But, it’s understandable if you feel a little daunted when it comes to learning all of the various terms, phrases and acronyms. 

You’ve probably asked yourself—what is an ETF? Exchange-traded funds or ETFs are basically baskets of investments that you can invest money into. They can be made up of bonds, commodities, real estate, stocks, or other assets.

Here, we’ll cover the basics with regard to investing in ETFs.

Investing in stocks 

Before we dive into ETFs, let’s discuss stocks. Essentially, a stock is a piece of a company that you can buy and sell. When you own a company’s stock, you own a piece of the company. 

The stock loses or gains value depending on how the company performs. In the simplest terms, if the company does well, the stock gains value. When it does poorly, the stock loses value.

Stock is sold on an exchange. There are stock exchanges all over the world, but the majority of investors in the U.S. buy and sell stock on the New York Stock Exchange (NYSE), the largest exchange in the country.

The stock market refers to all the activity that happens on stock exchanges collectively.

Stocks vs ETFs

So, how do stocks relate to ETFs?

One piece of stock represents one share in a single company. When you buy or sell that stock, you buy or sell one piece of that one company.

ETFs are baskets of investments, meaning that when you buy into a single ETF, you’re investing in multiple companies or assets like gold or real estate.

The different types of ETFs

There are a variety of different types of ETFs, and here are some of the most common.

  • Bond ETF:

     

    These include investments like corporate bonds, municipal bonds, state bonds, and government bonds.

  • Commodity ETF:

     

    These include investments like gold, oil, coffee, sugar, milk, cotton, and almost any other kind of commodity.

  • Currency ETF:

     

    These include investments in international currencies like the Euro, Canadian dollar, Swiss franc, and Indian Rupee.

  • Industry-specific ETF:

     

    These include investments based on industries like banking, energy, and technology.

  • Real estate ETF:

     

    These include investments like real estate companies and Real Estate Investment Trusts (REITs).

As a rule, always research and do your due diligence before you invest. There’s no such thing as knowing too much when it comes to putting your money to work.

How to Buy ETFs

To trade on an exchange, you’ll need a broker. Brokers are professional traders who are registered with exchanges. When people want to buy or sell something on an exchange, they contract a broker to do it for them, and these services usually come with a fee. As with trading on an exchange, you’ll need a broker if you’re going to start investing in ETFs.

There are now a host of different options for online brokers and traditional brokers. The cost and services provided vary, so shop around before you settle on one. The main thing to look for is whether the broker manages actively or passively. 

Actively-managed ETFs mean that the broker buys and sells investments of the ETF. These services cost more than passively-managed ETFs. Brokers take a more hands-off approach with passively managed ETFs.

Some popular online brokers are E*Trade and TD Ameritrade, which are both options for beginners. 

Remember, there is no such thing as a safe investment, and once you start investing, you can always stand to lose some, if not all of the money you’ve invested. Even well-researched investments can lose value quickly due to factors beyond your control like shifts in the market, economic downturns, or geopolitical strife.

That being said, investing also offers a great opportunity to increase your earnings and get a significant return on your money. After doing your due diligence, start with money you’re comfortable investing, at least until you get the swing of things. As we said before, an active interest in smart investing clearly represents the desire to better your financial future, and that alone is worthy of recognition. Remember, always do your research and good luck!

Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.

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