A Brief Overview of Funds and ETFs
What are Funds and ETFS? Basically, an exchange traded fund is simply a group of securities that have been purchased and re-sold in the open marketplace. Basically, funds are pooled investments, made from diverse investments, with each holding a different “class” of security. For instance, one investment may be held by a large company, another may be held by a small start-up. Funds and ETFS serve to combine the buying power of numerous investments, into one. As such, they offer greater diversification than any individual securities or group of securities, and the result is, over time, higher gains per share.
An exchange traded fund is typically a specific type of investing product and therefore, there is a great deal of inter-relatedness among different mutual funds. This inter-reliance often makes it difficult for investors to choose the right fund. Therefore, a good fund research system allows the investor to look at how different sectors or industries are faring against each other, allowing the investor to make more informed choices. For instance, it is possible that small cap stocks are doing well, but large cap stocks are doing just as well, and so the investor should diversify his or her portfolio across all sectors, in order to capture the full benefit of diversification. Similarly, an investor must also look at the overall performance of the fund, in order to know how well the fund will perform. Dividing the net asset value of the fund by the current market price per share, tells the investor what percentage of the fund’s price has been made up from the trailing period.
Funds and ETFS are very similar to mutual funds, but instead of having to buy individual securities, like mutual funds, investors make money when they sell them. Funds are designed for direct investors, and while they can certainly do quite well, actively managed funds tend to have better success. Funds and ETFS are similar to basket funds, and both are available to any individual who wants to invest in managed funds. However, ETFs tend to be less actively managed than actively managed funds, and so generally the investors who buy ETFs are doing so with the express purpose of buying ETFs, which are less risky. If you are an investor looking for a good investment vehicle, it is likely that actively managed funds, on average, will do just as well as ETFs, but in most cases the gap between actively managed funds and ETFs is narrow, which makes ETFs a much more attractive investment vehicle.