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ETF - A Simple Explanation!

Probably you have heard in the investment world about Exchange Traded Funds or ETFs. However you may be wondering: what exactly is an ETF? I will explain ETFs to make it easy for you to understand. ETFs have been around on the financial markets since 1991.The following table shows the growth of ETFs over the years from the early 2000’s until now. As you can see from the table below, starting from less than 300 to now over 8,500 ETFs available today.

In the US markets alone, there are about 2800 ETFs from which to choose. So what is an ETF? The best way to explain it is to break it down by each part of its name.

Let’s start from the end: Fund. A fund is a basket of investments that tries to follow the performance of a particular index or sector. As a basket, it has several individual investments included to make up the whole. For example for the airline sector, instead of only owning Delta Airlines as an individual stock, the Fund would have multiple airlines to include Delta, American, United, Southwest, etc. As you can see the fund has more diversification than just owning an individual stock.

Next, we will move to the beginning: Exchange. The Exchange means that the ETF is traded or bought and sold on one of the financial stock trading indices like the New York Stock Exchange (NYSE) or NASDAQ, however ETFs can be purchased from the many different financial companies like Fidelity and Morgan Stanley. By trading on an exchange, that means you can see the price movement up or down throughout the day when the exchanges are open. This gives ETFs a level of transparency.

Finally, we will take on the meaning of Traded. This just means that similar to stocks, ETFs can be bought and sold throughout the day and its price is determined by the underlying value of the basket of investments that it holds and the buy and sale action on the exchange on which it trades. Since it can be bought and sold throughout the day, this provides a level of liquidity for the investment.

There are many different types of ETFs available. ETFs range from stocks, bonds, commodities, and sectors. With so many ETFs available, how can you choose? That is where Paycheck to Wealth comes in to provide guidance and assistance. Please contact Paycheck to Wealth to learn more about the benefits of owning ETFs.

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