Exchange-Traded Funds (ETFs)
What are they?
Exchange-Traded Funds are professional funds that track certain indexes of stocks. Many private companies, such as Vanguard Securities, offer ETFs that customers can buy. For example, one ETF may track the S&P 500 by owning every single company in the index, while another ETF may be geared toward foreign stocks and own a large portfolio of stocks based in China and India. When you buy an ETF, you are really owning a very small share of the tens, hundreds, or thousands of companies that the company tracks.
Advantages and Disadvantages
ETFs are less prone to sudden drops or sudden appreciations than regular stocks, since they represent a large basket of stocks as opposed to one company. As a result, the risk is lower but the potential for gain is also lower. If you believe, for example, that in the next few years foreign stocks will do much better than domestic ones, but you don't know which specific companies to watch out for, a foreign ETF might be a good option for you. You are picking which sectors will do well, instead of which companies will do well.
Role in your Portfolio
Overall, ETFs are convenient, cost efficient, tax efficient and flexible. They are easy to understand and easy to use, and they are rapidly gaining in popularity, and some experts anticipate that they will one day surpass the popularity of mutual funds. You should definitely look into them to see if they would be a good option for you portfolio, because they can be very lucrative while safe.
Different Types of ETFs
The screenshot below shows different types of ETFs that Vanguard offers. Their ETFs are called VIPERS, and they represent different types of market sectors. They are very easy to buy and sell, and are traded openly on the stock market.
