What is an ETF?
ETF is short for Exchange-Traded Fund. It is a type of open-ended fund which features the ability to trade on exchanges, just like a stock. Compared to other funds such as hedge-funds, ETF is safer and more flexible, because you can simply buy and sell it online at a market price. Many ETF tracks indexes and attracts passive retail investors for its simplicity. In this case, if you’re seeking for a secure and convenient investment tool, ETF might be your best choice.
Getting to know ETFs
There are various ETFs being traded every day in the real world. Some of them track an index of stocks such as SPDR S&P 500 (SPY) and SPDR Dow Jones Industrial Average (DIA), while others target specific industries, including Commodity ETFs and Sector ETFs.
The internal mechanism of ETF is very simple. ETFs are regulated by a specific agent called APs (Authorized Participants). AP can increase the share of ETFs by selling shares in the market, and reduce shares by buying shares. This process is called creation and redemption.
Buy, or Not to Buy?
This question depends on your own position. You should find out whether you’d like to keep your life simple and receive dividend regularly, or seek for higher returns and actively get involved in the stock market. If you’re the former kind of person, to buy some shares of ETF is a good choice.
The most obvious advantage of ETFs is its simplicity. As said before, ETFs is a basket of stocks, so you can save your money and time from picking and buying a portfolio individually. In particular, the index ETFs can lower your expense further by tracking an index and avoiding complex operations.