Basic 1.1: What are exchange-traded funds?
Welcome to EasyEquities’ basic course on ETFs. In this course, you will learn what ETFs are, how they work, and why they are popular among investors. You will also learn how to choose, buy, and sell ETFs, as well as the benefits and risks of investing in them.
Let’s start with the first module: What are ETFs?
ETFs, or exchange-traded funds, are a type of investment fund that can be traded on a stock exchange like a stock. They are composed of a basket of shares, such as stocks, bonds, commodities, currencies, or a mix of them, that track the performance of an underlying index, market, sector, or theme.
For example:
- Imagine an ETF tracking the JSE Top 40, so you own a small piece of each of those big companies.
- An ETF that tracks the gold market will hold physical gold or gold-related shares, and its price will reflect the changes in the gold price
- There are even ETFs that track specific investment themes, like the top 500 leading tech companies in the US, renewable energy, property, or an index following the 1500 stocks from developed world markets.
ETFs are similar to mutual funds, which are also a type of investment fund that hold a basket of shares. However, there are some key differences between them:
ETFs are traded throughout the day on a stock exchange, while mutual funds are traded only once a day at the end of the trading session.
Here are the key characteristics of ETFs:
- They can be traded on a stock exchange like a stock, which means they offer more trading flexibility and liquidity than mutual funds.
- They track the performance of an underlying index, market, sector, or theme, which means they can offer more diversification than individual shares.
- They typically generate less capital gains distributions than mutual funds, but not always.
- ETFs are usually passively managed, meaning they could have lower fees and expenses than other types of funds because they do not have active managers who buy and sell shares within the fund.
In the next lesson, we’ll dive into the nitty-gritty of ETFs and how they work.