Q. What factors do I need to consider before investing in ETFs?
A. Exchange-traded funds (ETFs) can be powerful investing vehicles. They trade intraday like stocks. Yet, like mutual funds, they are baskets of investments (e.g., stock ETFs hold a basket of stocks) representing the entire market or specific segments of it.
With more than 2,000 ETFs available to trade representing stocks, bonds, and commodities, including passive and actively managed strategies, ETFs offer a wide variety of options allowing investors to implement a short- or long-term strategy.
Once you've determined your investment strategy, which may be implemented in whole or in part through the use of ETFs, you still need to do your homework before investing in an ETF. Below are five key factors to consider:
A. Exchange-traded funds (ETFs) can be powerful investing vehicles. They trade intraday like stocks. Yet, like mutual funds, they are baskets of investments (e.g., stock ETFs hold a basket of stocks) representing the entire market or specific segments of it.
With more than 2,000 ETFs available to trade representing stocks, bonds, and commodities, including passive and actively managed strategies, ETFs offer a wide variety of options allowing investors to implement a short- or long-term strategy.
Once you've determined your investment strategy, which may be implemented in whole or in part through the use of ETFs, you still need to do your homework before investing in an ETF. Below are five key factors to consider:
- The characteristics of the ETF (asset class, desired exposure, risk, active or passive, etc.)
- The benchmark it seeks to track and its track record at doing so (tracking error)
- The underlying holdings (the specific investments the ETF provides exposure to)
- Liquidity (a factor that can impact an investor's ability to buy and sell at a specified price)
- Trading costs
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