When we think of making money in finance, several options run through our minds. We all know stocks jump to the top of the list. It’s reasonable; stocks are awesome, they’re sexy, they’re high risk and we love it. Stocks are the bad boy of finance- you just know when you see some guy roll in the street in his R8, he invested in some good stocks! However, even with all the appeal that stocks bring, they also bring an undeniable high level of risk. On that note, I’d like to introduce you to their less hot, sort of nerdy friend: ETFs.
Exchange traded funds are that guy you never gave a second look to in high school and then you catch them out at the bar a few years later and slap yourself for never giving them a chance. I know everyone has heard of ETFs but are you really sure what they are, what they do or most importantly, how are they going to make money for you?
Basically, ETFs are securities that follow different types of commodities like bonds, index funds or even indexes like the S&P 500. What ETFs attempt to do is match (and they sometimes outperform) the returns of the index that they’re following. ETFs may also outperform any active form of investing whether it be stocks or mutual funds.
They offer instant diversification to your portfolio- ETFs include stocks and bonds across indexes or even markets for a pretty low risk. They are a great step towards building a more diversified portfolio. On top of that, what’s so great about ETFs is that they trade like a stock- you can even short them or buy them on margin! This gives them a high liquidity for easier trading and on top of that there are no management fees.
Now since there are mostly university students reading this article, one great thing we have to offer that our respected elders don’t is the time value of money. ETFs are a great way to earn more money over a long period. Rather than just putting your money in your extremely low interest savings account, you can invest that into your ETF which provides you with a higher growth potential. Most ETFs do pay out dividends and there are even specialized ETFs focusing on companies with high dividend payouts if you’re aiming for a regular income from your ETF.
The bottom line is ETFs are great. They give you the liquidity of stocks, the diversification that a mutual fund brings to your portfolio WITHOUT the high fees, they provide good returns for an incredibly low risk security and over periods of time, they give you immense cash growth. So next time you’re looking to invest, don’t forget about your nerdy friend, the ETF.
Writer: Pooja Paturi
Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.