ETFs: Why Trade ETFs | Integrafintech

Stock and ETFs

Exchange-traded funds

Take a closer look at ETFs.
An inexpensive way to diversify and invest in your interest.

Exchange-traded funds, explained.

Let’s say you’re interested in a particular industry but don’t want to choose just one company to invest in, with an ETF, you don’t have to. ETFs are made up of a collection of securities like stocks, commodities, bonds, and other investment types. This allows you to invest in a particular sector, industry, or region instead of having to buy individual stocks.

What's an ETF?

ETFs are funds that pool together the money of many investors to invest in a basket of securities that can include stocks, bonds, commodities, etc. That means when you invest in one ETF, you’re exposed to all the underlying securities held by that fund (which can be hundreds). ETFs are traded like stocks on the stock exchange (hence, the name exchange-traded fund) – they’re bought and sold throughout the trading day. That means the price of an ETF share can fluctuate above or below its net asset value (NAV) based on supply and demand.

How much of a portfolio should be in ETFs?

If you’re interested in building an all-ETF portfolio, keep in mind, even though an ETF itself is inherently diverse in nature, you’ll still need to diversify your entire portfolio. If you only own one ETF, you’re putting all your eggs in a single investing basket. Fortunately, it’s fairly easy to diversify a portfolio with ETFs.

ETF diversification

Portfolio diversification is an important investment strategy that may help you better manage the risk of market volatility. Since ETFs consist of numerous holdings (sometimes spanning many industries) within a single fund, the negative effects of any up and down swings in the market are typically less severe.
What’s more, you can achieve diversification by investing across asset classes, industries and countries or by choosing funds with holdings in different asset classes.
For example, you could invest in a government bond ETF, a precious metal-tracking commodity ETF and a foreign currency ETF.

The anatomy of an ETF.

We broke down the inside of an ETF to give you a better idea of what a potential investment could look like.
The companies we show are used as examples and aren’t meant to represent a particular or actual ETF.

The cost of ETF investing

ETFs are typically passively managed (compared to actively managed mutual funds).
This means that instead of a fund manager using their knowledge to select the
investments in the ETF, they simply select securities to try and keep pace with a major
benchmark, like the Dow Jones Industrial Average or the Russell 2000

Since they’re less time-intensive for brokerages, ETFs tend to have lower expense ratios (a.k.a.
the cost for operating and managing a fund) than many other investment choices.

Even better, when you invest in ETFs, you’re able to invest in hundreds or even thousands
of securities with just one transaction. Not only does this allow ETF investors to hold portions
of stocks they might not be able to afford otherwise (like Berkshire Hathaway), but it can also mean
commission-free trading.

Before you invest, you should carefully review and consider the investment objections, risks, charges and
expenses of any ETF you are considering. ETF trading prices may not necessarily reflect the net asset
value of the underlying securities.

What to consider when choosing the right ETFs

Before you can build an ETF portfoilio, you'll need to think through these factors.

Your investment goals

Are you stocking away for retirement, saving for a splurge in the
short-term or collecting cash for college tuition? Defining your goal – whether long- or short-term – makes a difference to your ETF investment strategy.
For instance, long-term investors with a larger investment time horizon can consider taking on more risk.

Your risk tolerance

Knowing what level of risk you’re willing to tolerate can help you
determine your asset allocation – that is, how the assets in your portfolio are allocated to balance risk and reward
. Your risk tolerance is determined by several factors including age,
net worth and even why you’re investing

Your current income needs

Determining how investing fits into and feeds your budget is another crucial
consideration. What kind of cash do you have available to invest? Are you looking to bring in a steady stream of returns now? If so, you might want to add a mix of dividend-paying or fixed-income ETFs to your portfolio.

4 steps to build an ETF investment strategy

Open a self-directed trading account. Start with a self-directed trading account. That puts you in the driver’s seat of your trading strategy, decisions and transactions
Determine your allocation. Asset allocation is an investment strategy that aims to strike a balance between risk and reward and to attempt to reduce risk in your portfolio by investing across different asset classes. Depending on your goals, you may find you’re comfortable investing more heavily in bonds (often a lower-risk investment) than stocks, for example.
Apply your strategy. After determining an asset allocation that fits your goals, it’s time to apply your investment strategy. That means:
First, determining how or how often you want to invest funds – whether it’s a fixed amount of money at regular intervals (like paying a bill), an annual investment or somewhere in between
Second, selecting ETFs that align with your goals and allocation. Our ETF screener can help you investigate thousands of ETFs
Track your performance. Once you’ve built your portfolio, it’s crucial to track its progress against your goals. If the portfolio isn’t performing as well as you want, you can adjust your allocations. Remember, many factors like market conditions, business performance and even international events can impact how a portfolio performs, so it’s a good idea not to make adjustments more than once or twice a year.

ETFs are a great way to take some of the complication and confusion out of investing. Not only do they give you access to stocks that may be too expensive to purchase individually, they’re also passively managed (often incurring lower fees than their mutual fund companions) and can be bought commission free — making them a less complicated, more affordable alternative for investment novices and pros alike.

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