ETFs – Definition and How to Invest
ETFs (Exchange Traded Funds) are instruments that give exposure to a specific market index. For instance, equity ETFs are perfect instruments for investors who want to have an exposure to an equity index without worrying about stock picking or fund selection. ETFs do not hold intrinsic risk like single stocks do, and they do not carry management risk like equity funds do. They just track the market. This is why they are often designated as “trackers”. When we select funds we expect them to outperform the market. When we invest in ETFs however, our objective is to just replicate the market’s performance with no over-expectations. Investing in ETFs is much less expensive than investing in funds because they don’t bear management fees. Besides, ETFs are traded daily on exchanges, which makes them more liquid than most funds.
The most popular ETFs are equity index ETFs that aim to track an equity index such as the S&P500, the Eurostoxx50, the NIKKEI, etc. There are also bond ETFs as well as commodity ETFs that follow the price of a specific commodity such as gold or oil.