What is an ETF?
The benefit of owning an ETF as opposed to a stock is that they are unaffected by company news. For example if you are bullish on OIL you decide to buy BZP an oil company. However if BZP suddenly becomes under government investigation their stock will go down. This is true even if the price of oil goes up. If you bought the oil ETF USO you will make money if the oil commodity goes up. You do not have to be conserved about what will happen with a given oil company. Commodity ETFs can also be a good way to handle inflation. If the price of the dollar is going up the price of silver and gold can be going up relative to the price of a dollar. They can be bought on the open market just like stocks. You should be able to buy them through your broker just as easily as you buy stocks. If you are going to use ETFs be sure you trade them just like you would a stock. The rules do not change. Advantages and Disadvantages of Exchange Traded Funds There are a couple advantages to these funds. For starters you can invest into an industry group without having to do research on individual companies. If you think an industry group is heading up you can simply by an ETF that tracks the whole group. Another advantage of ETFs is that they are by nature diverse. You always hear that it is important to diversify between many different companies. Well with an ETF you can easily do that just by buying 1 investment. This means you can have a diverse portfolio even if you do not have the money to buy 20 or 30 different stocks. The main disadvantage of these funds is that they tend to charge you for investing into them. However the amount that they charge you is minimal when you consider how much mutual funds charge. |
