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2. How to invest in ETF?

Different Types of Exchange-traded Funds

ETFs come in broad categories, just like mutual funds. Major asset classes include equities (stocks), bonds, commodities, money markets, precious metals, and real estate. There are ETFs focused on different regions, countries, market sectors, assets, and themes. There’s an ETF for just about any investment plan or focus.

  • A large number of ETFs track an index. This means they go up and down with major indexes like the S&P 500, Russel 3000, or Dow Jones Industrial Average. For example, if the S&P 500 goes up 2%, all S&P 500 index funds will go up the same 2%.
  • ETFs can fill many different roles in your portfolio. For example, if you’re looking to earn money from your portfolio, you could buy dividend and fixed-income ETFs that make regular payments to shareholders. Not too long ago, I bought a real estate ETF because I didn’t have enough cash to buy actual real estate.
  • If you think the dollar is about to fall and gold will go up, there are gold and other precious metals ETFs. If you are gung-ho on agriculture, you could invest in a commodities or agriculture stock ETF.

With thousands of ETFs to choose from, it’s easy to diversify and customize your portfolio. It’s also easy to get lost with all of the available options.

Pros and Cons of ETF Investment

Pros

  • Instant diversity for your portfolio
  • Low costs
  • Easy to trade on the exchange
  • High liquidity
  • Low volatility
  • Tax efficiency

Cons

  • Potential trading commissions
  • Possibility of contango (see below) when ETFs don’t stay in line with underlying assets
  • You don’t actually own the underlying asset

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