ETF EducationMarket history

What is an ETF and why are they so popular?

By April 21, 2019 No Comments

ETF’s have become very popular investment vehicles and it is very important that you know what they are. What is an ETF, and why have they become so popular? To understand, first let us breakdown the term. ETF stands for exchange traded fund. This means it is a security that trades on the US stock exchanges similar to the way a normal stock does. If you have ever bought or sold a stock then buying and selling an ETF will feel very similar. ETF’s have share prices just like stocks do, and you can buy and sell them at anytime just like you can with stocks.

 

How are ETF’s different from a stock? Where a stock represents shares in one specific company, like Apple stock, an ETF represents shares in a plethora of companies. Here’s how it works:

 

  1. The Fund manager chooses which stocks he is going to buy for the ETF
  2. Shares of the ETF are then sold to the investing public
  3. The value of the ETF rises or falls with the value of the stocks inside of it

 

One of the best analogies for understanding ETF’s is to think about going to the grocery store. When you go to the grocery store you walk around filling your cart with everything you need. You might spend $100-$200 on 30-50 different items ranging from milk, eggs, and pasta to toothpaste, toilet paper, and laundry detergent. Think of an ETF like your cart at the grocery store, but instead of food and household essentials your picking out your favorite stocks.

 

The most popular ETF’s may contain well known stocks like Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook (FB), Berkshire (BRK.B), JP Morgan (JPM), Proctor and Gamble (PG), Nike (NKE) and tens of others! An ETF may contain 50-100 different stocks inside of it, or between 100-1000. There is a huge amount of variety when it comes to picking the best ETF’s to invest in.

 

Now that you have had the chance to learn more about ETF’s, let’s examine what makes them so popular. Here are 3 key reasons why ETF’s have become so popular:

 

  1. Affordable. Instead of having to spend money on multiple transactions buying 10 or 20 different stocks, you can make one transaction and have exposure to all of them.
    1. Stocks like Amazon can cost $1,600 or more for 1 share, but an ETF that owns Amazon stock may only cost $30-$70 per share. This allows you to invest in Amazon stock at fraction of the price
  2. Variety. There are hundreds, if not thousands, of ETF’s to choose from.
    1. Want to invest in the best technology stocks? There’s an ETF for that. Want to invest in the safest bank stocks? There’s an ETF for that. Want to invest in emerging markets like China or India? There’s an ETF for that too!
  3. Professional management. All ETF’s have a professional managing the fund so you don’t have to worry about choosing the best stock or making emotional decisions.
    1. You can’t beat Lebron James in basketball and you probably can’t manage investments better than a professional either. Worse yet, you might lose money trying.

 

At Blue Haven Capital, we specialize in identifying the best ETF’s to invest in for our clients. The affordability of ETF’s allow us to keep trading costs low, and those savings flow directly to our clients in the form of higher returns. We scan through hundreds of ETF’s to find the best ones to suit each client’s individual needs and investment objective. If you want to learn more about ETF’s, how to trade them, or how we trade them, give us a call. We’re happy to provide a free consultation to answer any questions you have!

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