Published on: August 31, 2022
Author: Laura Brocca
|Table of Content
|What are exchange traded funds?
|How do ETFs work?
|Advantages of investing in ETFs
|Pros of investing in ETFs
|Cons of investing in ETFs
|What’s the difference between an ETF & a mutual fund?
|Three common types of ETFs
|Steps to start your trading journey
An exchange-traded fund, aka ETF, is one of the most common choices for beginner investors who want to kick off their trading journey with a diversified product.
Let’s dive into what ETF means and how it differs from other investments.
We’ll also guide you through some of the most typical ETFs you’ll come across in the markets and even show you how to invest in ETFs step by step. YALLA.
Let’s say you’ve been considering investing in pharmaceuticals but are unsure which pharma company to invest in. With ETSs, you don’t have to choose just one.
A pharmaceutical ETF could include shares from many pharma companies, giving you a more comprehensive range of investments in this industry.
It also lowers your risk of betting on only one company. With an ETF, if the value of one company drops, it could be offset by the value of another company in the same basket going up. More on that below.
So, what is an ETF exactly? An exchange-traded fund, or ETF, is an index fund that acts as a group of securities. Think of an ETF as one basket holding multiple securities, such as stocks, bonds, commodities, or even currencies.
That’s why investing in ETFs is a great way to diversify your portfolio—a single ETF is made of several assets instead of just one. You can even buy an ETF that holds thousands of companies. Want to know more? Let’s dig deeper.
And that’s how ETFs work, in a nutshell.
Diversification & lower risk: When you buy an ETF share, you invest in securities belonging to multiple companies.
You could even invest in securities spanning different industries, such as cybersecurity, automotive, energy, and tourism, in one ETF. That makes investing in ETFs a pretty diversified type of investment and even lowers risk.
When you invest in ETFs, the performance of your portfolio isn’t tied to the risks of a single company or industry sector. So, we can say that the main advantage of investing in ETFs is a lower risk of volatility. Although, there’s never a guarantee that you’ll make or lose money on your ETF.
Are these all of the advantages? What about some disadvantages? Don’t worry; we’ve got you covered with those, too.
Now let’s take a look at a few disadvantages too:
You’ve probably heard of a mutual fund investment and wondered if these two things are the same. We’re here to tell you they’re not. There are significant differences between exchange-traded funds and mutual funds.
Key difference 1: Firstly, ETFs, like any other shares, can be actively bought and sold on exchanges.
But the only way to buy a unit of a mutual fund—even though it’s listed on the exchange—is from a fund house.
What the heck is a fund house? Another name for a fund house is an Asset Management Company (AMC). AMCs are organizations that invest investors’ pooled money in stocks, mutual funds, securities, etc.
Key difference 2: ETFs tend to favor a market index, such as the S&P 500 index, which is thought to be the best single gauge of large-cap equities in the US.
Because ETFs are pegged to the performance of a particular stock index (aka, they mimic the ups and downs of the stock market), they can also be a fantastic way to dabble in passive investing.
You can use a passive ETF method and invest in a whole index while getting all the advantages of low costs and transparency that are simply not there in active investing.
Key difference 3: ETFs usually have cheaper rates than mutual funds. When you buy exchange-traded funds, you typically pay lower fees than when you purchase mutual funds.
Note: This gap is getting smaller and smaller by the day as mutual fund companies are actively competing with ETFs for investors’ money.
In fact, mutual fund companies are slashing their fees to compete with low-cost exchange-traded funds (ETFs).
Is that all? Not quite.
Wondering what some popular ETFs to invest in are? We’ve got you covered with that too.
There are three most common ETF types in the market:
These follow popular indexes like the S&P 500 stock index, which we already explained when we told you about the difference between an ETF and a mutual fund.
Index ETFs can follow many different indices.
This type tracks a narrower part of the market and represents unique market segments, like gold or oil. Alternatively, they focus on a minor part of a larger group of assets (e.g., small companies, foreign companies, or cybersecurity companies). When people buy these ETFs, they usually face more political, currency, and market risks.
This type is run by a team of investment managers who do research and decide how the ETF’s portfolio should split up.
And that’s it – those are the three main types of ETFs.
The expense ratio is a fee charged by mutual funds and ETF providers for managing this asset. That’s why the expense ratio of an ETF reveals how much of your investment will be taken in fees each year.
How do we calculate it? A fund’s expense ratio equals the fund’s operating costs divided by its average assets. So, the actual performance of your investment is the ETF performance minus the annual expense ratio.
you can also read about single-stock ETFs
Open your trading and investing account.
Select your ETFs after doing extensive research.
Let your ETFs do the work in the long run.
Before you start investing in ETFs, you’ll need a good brokerage account. Most online brokers now provide commission-free stock and ETF trading, so the price isn’t sky-high.
The best option is to closely examine the platforms and features of each broker and pick the one that best suits your investing goals.
If you’re a beginner investor, it’s a good idea to go with a broker like E*Trade (NASDAQ: ETFC), TD Ameritrade (NASDAQ: AMTD), or Schwab (NYSE: SCHW).
That said, there are plenty of others to pick from.
You can also open an account and trade a wide range of ETFs with amana. We give you the possibility to trade thousands of ETFs through our all-in-one app.
What’s more, you can enjoy both commission-free and fractional trading. Not to brag, but we’re also an excellent choice for those looking for UAE ETFs or Saudi ETFs.
Passive investing in ETFs is often the best choice for those new to trading.
Index funds are less expensive than actively managed funds, and most actively managed funds don’t meet their benchmark index over time.
With that in mind, here’s a list of the best ETFs for those of you only starting to build your portfolios, based on expected returns, momentum, and the expense ratio, among other factors.
You’ll also find a note of what each invests in.
Invests in medium-sized US companies.
Invests in more prominent non-U.S. companies.
Invests in smaller US companies.
Invests in companies from countries with developing economies.
Invests in international bonds and US bonds of several durations and maturities.
Invests in the Nasdaq-100 Index, aka tech and other growth-related stocks.
You’re probably wondering what would be the best ETFs for long-term growth? It’s hard to say as any ETF has pros and cons. But we can tell you that Vanguard and Schwab both provide low-cost stock market access, which is why their ETFs are among the most affordable in the industry.
It’s important to remember that ETFs are often designed to be low-maintenance investments. What does that mean?
It means newer investors have a bad habit of checking their investments frequently and reacting emotionally to significant market movements. In reality, so-called “over-trading” is the primary reason the regular fund investor underperforms in the market over time.
So, once you’ve invested in some strong ETFs, the best suggestion is just to let them be and do what they’re supposed to do: generate great long-term investment returns.
ETFs allow you to invest without being as hands-on and are a simple way to get started in the market.
If you’re unsure how to choose ETFs for your portfolio, open an account with a reputable broker like amana, where you can tap, swipe and trade a wide variety of ETFs.
Many such companies recommend low-cost ETF portfolios so you can benefit from the investment vehicle without exploring the numerous options.
decides to put all his money in one promising tech stock, he is sure he is going to double his earnings
but due to a problem in the technology sector the business loses and the stocks drop.
he loses a great deal of money because that was his only investment
has a hard time deciding on a stock, so he invests in a well-known ETF that invests in several promising companies
some companies lose money, others make huge profits and others lose.
his investment makes more profits than losses and ultimately he makes a considerable gain
At amana, we offer you a wide variety of exchange-traded stocks.
These stocks are traded on an organized exchange, an approved alternative trading venue, or directly with specialists or market makers with an inventory to buy and sell.
The price of each transaction has to meet specific regulatory requirements, which tend to differ by country. In the US, for example, there’s always a nationally recognized best bid and offer.
This is sometimes referred to as NBBO. with amana
Because of that, it would be a violation for any broker to execute a trade at a price worse than NBBO, and a broker that executed such a transaction would be guilty of a crime according to US law.
All amana exchange-traded stocks are executed in a fully compliant way determined by each country’s best execution rules, and we take pride in that.
Move forward with steady steps towards increasing your knowledge, and when you feel that you have gained enough experience download the amana app. And start your investment journey with us.