By James Woolley
Exchange traded funds, or ETFs for short, have become really popular in recent years. Not only are many investment managers investing in them, but many private investors are doing so as well. So what are the benefits of ETFs, and what exactly are they?
Well in simple terms they are basically funds that hold assets in certain financial instruments or track specific markets. There are exchange traded funds for pretty much everything nowadays. This includes stocks, indices, commodities, bonds, real estate and currencies.
So for example if you want to benefit from any future rise in the FTSE 100, for instance, you could buy a FTSE 100 ETF rather than invest in all 100 companies that make up this index. These instruments are easy to trade because they are listed on the stock market and can be bought and sold just like ordinary stocks.
If you invest your own money you should really consider buying these ETFs because they give you lots of options. There will often be times when the stock market and the property market are overvalued and unlikely to rise much further in the near future, but there will always be some kind of instrument that will look undervalued.
So rather than holding on to your cash waiting for a market correction, you can put your money to use investing in one of these undervalued assets through an exchange traded fund. For example if you think crude oil has to keep on rising in the long term due to it being a finite resource, then you might like to invest in a crude oil ETF.
These are great for long-term investors, but you might also like to dip in and out of them on a short-term basis as well. They can be bought and sold very easily so you could buy this same instrument whenever crude oil has a brief period of weakness and looks oversold in the short term, and sell them when it rises a few days or weeks later.
They really are flexible and give you a lot of options as an investor or trader. You can even buy leveraged ETFs if you are particularly confident about a short term price move. These are very risky but they do give you greater gains if your prediction is correct.
Anyway the point is that you should definitely consider adding a few of these ETFs to your portfolio. There are lots of ways to make money from them and they give you a great deal of flexibility. There will always be instruments that look good value in any given market so thankfully you can now profit from this by buying the corresponding exchange traded fund.
Click here to read a review of Zecco, the online stock broker that offers free trades, and to read all about Portfolio Prophet, the new course that teaches you how to successfully trade ETFs.