ands up if you’ve ever sat at a restaurant table, menu in hand, and been so overwhelmed with choice that you land up panic ordering, instantly second-guessing your decision the moment you place your order. We’ve been there!
Indecisiveness isn’t conventionally praised as a particularly positive character trait , but let’s flip it for a moment and consider an example of when leaving the ‘tough’ decisions to someone else may be the best option.
Imagine a scrumptious degustation menu at a tasting restaurant. Instead of fighting analysis paralysis, you get to sit back and let the chef cook up a collection of tasty samples, carefully orchestrated to deliver a harmony of flavours. You can forget food envy or FOMO as you get to savour a bit of everything. Something not to your taste? No problem, there’s a range of options to tuck into and you’re bound to find something you like.
What is an ETF? The stock market’s ‘tasting menu’ offering
Like a tasting menu comprised of an assortment of dishes, an ETF (abbreviation for Exchange Traded Fund), is made up of several securities. These are usually stocks, bonds, or commodities, grouped together based on some criteria. And instead of investing to receive a share of a single company, you’re investing in a fund for a share of a portfolio of assets.
ETFs are similar to mutual funds, where investors’ money is pooled for investment, but the key difference is that ETFs can be traded on the stock market, where mutual funds can't.
Often, an ETF will track (or mirror) an index and aim to reflect its asset weighting and performance as closely as possible. For example, the S&P 500 ETF Trust SPDR, tracks the ever-popular S&P 500 index (an index of the top 500 largest public companies in the U.S.).
Fun fact: The S&P 500 ETF Trust SPDR was the first ever ETF to be formed.
So, while we’ve answered the question “what is an ETF?”, you may be left wondering “why invest in ETFs?”. Great question!
Let’s dive into the benefits of investing in an ETF, shall we?
Why invest in ETFs? 3 appealing advantages for investors
1. Passive investing
Especially important for investors who are unsure or undecided about which stocks to invest in, passive investing simply means that you’re not actively choosing individual stocks to buy. With an ETF, the asset portfolio is managed by a financial institution that will decide which stocks are included in the fund.
If we think about the time that would be needed to thoroughly research all stocks on just one of the index funds, like our previous example of the S&P 500 with 500 companies, we can imagine it’s a going to add up to a ton of time we’d prefer to be spending elsewhere.
So, by adopting passive investing via ETFs, investors can save hours (if not days or weeks) worth of time.
Diversification is a key aspect of risk management in investing and involves, as examples, investing in:
- a higher number of stocks,
- a broader range of stocks from different industries or sectors, or
- multiple types of securities and risk levels.
The more diversified your portfolio, the more spread out your risk.
Consider this example. If you only hold one stock in your portfolio, and that stock is down on your capital investment, that value is your exact loss. If, on the other hand, you have multiple stocks with a mixture of results, your overall portfolio performance will be based on the balance of profit and loss. Essentially, the results of any well performing stocks can smooth out or minimise any potential losses from those underperforming.
Because ETFs are, by nature, a collection of multiple stocks, they benefit from diversification within themselves, and by adding ETFs to your investment portfolio, you’re broadening your exposure (this is a good thing) and reducing your risk.
ETFs are a cost-effective way to invest in the stock market. Let’s consider this example: the NASDAQ 100, an index that comprises 100 of the leading stocks of non-financial companies on the Nasdaq Stock Market. To invest in each company within the NASDAQ 100 will, at the time of writing, cost about $22,000, whereas investing in the Invesco QQQ Trust Series 1 ETF, comprising the same 100 stocks, currently costs around $300. That’s a significant cost saving!
While there are clear benefits and advantages of investing in an ETF, you should always remember that investment of any kind carries risk, and you should never invest more than you can afford to lose.
Now that we’ve covered off those interesting informational aspects of ETFs, we’re sure you’re asking yourself how to invest in an ETF. And, naturally, we have you covered.
How to invest in ETFs using Nemo
Nemo is here to make sure you never miss out on investment opportunities, and that includes ETFs. Our nemes are the easiest way to discover opportunities to invest and we have two nemes dedicated to ETFs. Here are two ETF nemes to get you started:
As the name suggests, our Popular ETFs neme brings together some of the most loved ETFs on the stock market, including the likes of the S&P 500 ETF Trust SPDR, Invesco QQQ Trust Series 1 ETF and the Dow Jones Industrial Average ETF SPDR.
View the Popular ETFs neme.
Looking for an ETF that gives you the benefit of diversification, lower cost, ease of investing and periodic dividend pay-outs? No, you’re not asking too much. Our Dividends ETFs neme offers investment opportunities for ETFs that have either monthly or quarterly dividends to potentially boost your investment returns.
Discover Dividend ETFs.
Ultimately, investing in ETFs is a great way for investors to diversify their investment portfolio with the least amount of effort and time, and at a comparatively lower cost than other methods. Whether you're looking to invest in a specific sector or asset class, or simply want to build a well-rounded investment portfolio, ETFs can help you achieve your financial goals. Explore our ETF investment opportunities now and take advantage of this innovative investment vehicle to help grow your wealth!