As we said last time, there are over 5,000 different exchange-traded funds out there – and growing!
Why have they become so popular?
As well as offering easy access to a diverse bunch of investments, ETFs generally charge lower fees 💸 than traditional funds and have no minimum investment amounts. You can usually start investing in an ETF with as little as £1. The average ETF charges about 0.4% (so if you invested £1,000, you’d have to pay about £4 a year), compared with about 0.7% for a traditional index fund. 🤫
You can buy ETFs to track almost any financial market you can think of: from Chinese 🇨🇳 stocks and the US 🇺🇸 dollar to platinum futures and German 🇩🇪 government bonds. You can even get ETFs for specific industry sectors – like biotech 🧬 stocks or semiconductor providers.
Put it this way: if stocks were pieces of music, then ETFs would be Spotify playlists. Instead of selecting an individual track to listen to, you just choose a theme (like tropical house or Mellow Mondays) and get a bunch of music 🎶 that fits that description.
So ETFs are purely passive?
Most ETFs just aim to track the performance of a market, which allows them to keep fees low. But there are a few funky numbers out there. Inverse ETFs 🔃 rise in value when the index they follow falls (and vice versa). For example an ETF that focuses on shorting the S&P 500 would gain 3% if the S&P 500 index of US stocks dropped 3%.
Leveraged ETFs, meanwhile, multiply the moves of their underlying investments – so if the S&P 500 rises 2%, a 3x leveraged ETF would climb 6%. There are also leveraged inverse ETFs – but you can probably figure that one out yourself.
That’s quite enough for one day. ✋🏼
Next, we’ll explore even more specialised sorts of ETF – active ones. In the meantime, why not spin some “German government bond” vibes on Apple Music?
Keep in mind that when you invest, your capital is at risk. This learning guide is for information purposes only and is not investment advice. Individual ETFs mentioned are examples and are not necessarily available through Wealthyhood.