ETF (Exchange-Traded Fund)

Another essential instrument type we would like to discuss is Exchange-Traded Fund (ETF). 

First, let's discuss what ETFs are.

An exchange-traded fund can be described as a mutual fund in which shares are traded like a stock on an exchange. Typically ETFs track some index, industry, or other asset performance.

Why invest in ETFs?

• Relatively low costs
• Liquidity
• Diversification
• Transparency

Types of ETFs

• Passively and actively managed - first tracks performance of an index or sector; second employs own investment strategies;
• Inverse ETFs - ones looking to gain on market declines;
• Leveraged ETFs - looking to multiply possible gains (or losses);

Besides the above, ETFs are classified based on the instruments they are investing in:

• Equity
• Bond/fixed income
• Commodity
• Currency
• etc.

Stocks vs ETFs

What should I choose? Why invest in ETFs when there are stocks?

A well-founded question, the answer to which is not so unambiguous.

Answering any such question, you need to return to the primary and unshakable postulates that we have already discussed:

- risk-return

- diversification

If you have confidence in a particular stock (company) and are well versed in it, investing in it is likely to be more effective. If the goal is to beat the market, investing in specific promising companies is the correct way than investing in a broad industry with a significant return difference between companies. Less successful companies will pull profitability indicators down. However, at the initial stage, and especially in the case of long-term investments, diversification to reduce risk is essential.