An ETF, or Exchange Traded Fund, is a collection of securities that tracks various assets, indexes, or industries.
For example, an ETF might track the S&P 500, a collection of the 500 largest U.S companies on the stock market. When you invest in this ETF, you are actually investing in all 500 of these companies. Some of your money would be invested in Apple, some in Nike, Amazon, Nvidia, etc… Think of an ETF as a bucket that contains hundreds of different stocks. When you invest in the bucket, you are really investing in all of those stocks.
On Bumper, you can invest in 13 different ETFs. These ETFs track the entire U.S. stock market, the global stock market, large U.S. companies, small U.S. companies, etc…
ETFs may be a good way to diversify your portfolio. Instead of putting all your money in one company, you may be able to gain access to many stocks across various industries. However, there are specific ETFs that focus on a single industry, like tech or healthcare. These ETFs limit a portfolio's diversification, but we can talk more about that in a later Bite.
If you come across an ETF and want to know what the ETF tracks, you can look up its prospectus. A prospectus is a detailed summary of an ETF’s investment objectives, holdings, costs, and other information that can aid an investor.
ETFs are issued and managed by ETF issuers. To pay for an ETF issuer's operating expenses, ETFs require investors to pay an expense ratio as a fee for management. ETFs overall seem to have lower expense ratios and fewer broker commissions.
After considering an ETF's expense ratio, it is also important to consider the ETF's liquidity. Liquidity means how fast it can be converted into cash when you want to sell. If you choose an ETF with low liquidity, it might hinder or delay you from cashing out. Often ETFs with high liquidity contain companies that are more well known.
Besides for industries, ETFs can be categorized into two types: actively managed and passively managed. Actively managed funds are as they sound. They are more actively managed by fund managers to achieve higher profits. Passive funds are the opposite. They often employ a buy and hold strategy, but frequently come with lower fees than an actively traded ETF.
So far, you’ve learned about investing, risk vs reward, stocks and shares, and now ETFs. Up next, we’ll discuss how the stock market works.