Buddhist Catholic Contemplative Evangelical General Christian Hindu Jewish Latter-day Saint Muslim New Visions Progressive Christian

Beliefs

Topics

Columnists

Resource Library

Research Tools

Video

Podcasts

Thought Readers

Faith In Media Tracker

Newsletters

Ad-Free & Subscriber Log-In Subscription Support

Follow Patheos

Faith and Finance

Home
Evangelical
Business, Finance and Religion
What is an ETF?

What is an ETF?

Last updated on: April 27, 2012 at 8:00 am by John Frainee

What is an ETF? 2012-04-27T08:00:56-05:00 John Frainee

LOGO Patheos Explore the world's faith through different perspectives on religion and spirituality! Patheos has the views of the prevalent religions and spiritualities of the world.

You’ve probably heard the term “ETF” before, but what does it mean? More importantly, how does one use ETFs within their investment portfolio? Let’s explore ETFs and see if they’re right for you.

What is an ETF exactly?

An ETF is an “exchange-traded fund.” This means that it is an investment fund traded on stock exchanges. They can be traded much like stocks and can hold a variety of different assets such as:

Bonds,
Stocks,
and Commodities.

Why Should You Use ETFs?

ETFs are an attractive investment option for a couple of different reasons. First, ETFs have low costs making them available to less capable investors. Second, they are rather tax efficient. Third, as mentioned previously, they can be traded much like stocks easily through an online broker.

Because of these reasons, ETFs have grown in number ever since the first surviving ETF in 1993 (Standard & Poor’s Depositary Receipts (SPDR). Year after year, there are more ETFs than ever.

How Do You Use ETFs?

Let’s say that Joe likes to trade ETFs through his online broker. He has $5,000 to invest and hears that ETFs might be a good option.

Joe starts researching ETFs and finds that the natural resource market is doing well, so he invests his $5,000 in a few natural resource ETFs. He does this through his online broker and monitors these investments very closely each day.

As you can see, investing in an ETF is rather easy. If you’ve ever bought a stock online, you’ll have no problem investing in ETFs.

How are ETFs different than mutual funds?

You might be saying to yourself, “ETFs sure sound a lot like mutual funds! What’s the difference?” There are several important differences:

1. ETFs are passively managed thus lower cost.

Remember how we discussed that ETFs are low cost? That’s because they are passively managed. Mutual funds, on the other hand, are actively managed and therefore often have fees twice that of an ETF.

2. ETFs change in price throughout the day.

Like a stock, you’ll see the price of an ETF change throughout the day. Mutual funds calculate their net asset value (NAV) each day.

3. ETFs are valued based on how well the underlying asset performs.

Mutual funds are managed by a fund manager, thus the value of a mutual fund is affected by the fund manager. ETFs on the other hand are valued based on how well the underlying asset performs, leaving out the middleman (the fund manager).

The Dangers of ETFs

While there are some benefits when it comes to ETFs, there are also some dangers to be aware of:

1. ETFs have various financial goals and expert advice is needed.

Don’t think that because investing in an ETF is easy to do you should dive right in. All investors should consult a financial expert to determine if buying a specific ETF is a wise investment.

2. Some ETFs are “synthetic” in nature.

Why are some ETFs called “synthetic?” They mimic the behavior of actual ETFs by utilizing sophisticated derivatives, such as swaps. These are very complicated practices that are risky and use methods like short-selling to increase returns. Watch out, you might lose a lot of money if you pick one of these ETFs!

3. ETFs are not managed by professionals.

Most ETFs track an index automatically. Remember, they are not managed by professionals such as fund managers. Fund managers are experts who eat and sleep investments, so some may argue that without fund managers, ETFs are automated disasters waiting to happen.

Choose What’s Right For You

If you’re weary about investing in ETFs, you might want to consider Dave Ramsey’s investment advice. He recommends investing in mutual fundswith long term track records, not ETFs. But if you feel comfortable trading ETFs and like the advantage of lower fees, ETFs might be just the investment for you. Check outfor $4.95 ETF trades.

What do you think about ETFs? Leave a comment below and let’s get the conversation started!

Sources: Investopedia and Wikipedia

Previous Post

April 26, 2012

Teaching Kids About MoneyA is for Apple....B is for Budget

Next Post

April 30, 2012 How to Improve Your Credit Score

Browse Our Archives

Select a Category ALL Bible and Money Biblical Perspective Book Reviews Budgeting Business Corner Churches and Pastors Debt Encouraging Scriptures Entrepreneurship Faith and Economics Family and Money General Personal Finance Giving Inspirational Quotes Investing Making Money Other Personal Finance Retirement Reviews Round Up Saving Self-Improvement Taxes Uncategorized

Select a Month January 2019 November 2018 October 2018 September 2018 August 2018 July 2018 June 2018 May 2018 April 2018 November 2016 October 2016 May 2016 March 2016 February 2016 January 2016 January 2015 November 2014 October 2014 August 2014 April 2014 March 2014 January 2014 December 2013 November 2013 October 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010

TAKE THE

Religious Wisdom Quiz

Who built the ark to survive the flood?

Select your answer to see how you score.

Abraham Elijah Moses Noah