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What Are ETFs and How They Make Investors Money

Exchange traded funds, more popularly known as ETFs, work quite like mutual funds. They have their own ticker symbol and are traded just like stocks.

ETFs hold assets such as bonds, stocks, and commodities. They typically operate with an arbitrage mechanism to ensure they trade close to the net value of the assets that they contain. However, deviations can occur.

The ownership of an ETF is divided into shares that are listed on stock exchanges.

Make sure to only invest in ETFs that are registered with the US Securities and Exchange Commission. Canadian investors should opt for ETFs registered with the Canada Securities and Exchange Commission. However, from what we see, US ETFs are more profitable.

You will need the assistance of a broker to invest in an ETF.

Most brokers charge a fixed commission for their services. However, in some cases, you might be able to buy or sell an ETF without having to pay a commission.

Understanding Exchange Traded Funds

It is important to know a few more things about ETFs to make a sound investment in an ETF.

Since ETFs include a variety of assets, it is important to pick a pool that you know about. Pay attention to historical figures, potential risks, and available investment strategies before making a decision.

Some exchange-traded funds utilize short stocks and super leverage, while some concentrate in specific industries. Remember that investing in an ETF is as risky as investing in any other asset. Prices can go up or down without any warning.

How ETFs Make Money for Investors

As mentioned earlier, ETFs work like mutual funds. However, unlike mutual funds, they’re traded at intervals throughout trading hours.

The trader has to keep an eye on price fluctuations and pick an appropriate price to buy or sell an asset. This is very important because prices change throughout the day.

The investor can set criteria on traders such as limit orders. This will set price limits on buying and selling. However, how an investor makes money mainly depends on the type of investments an ETF holds.

Available assets include bonds, stocks, commodities like precious metals, preferred stock, and famous indexes like the S&P 500 or The Dow Jones Industrial Average. Moreover, an ETF can also invest in real estate investment trusts (REITs).

Here’s how you will make a profit if you invest in ETFs:

  • Investors make a profit when the asset increases in value, i.e: when a stock gets more expensive due to reasons such as a positive outlook.
  • You will make money when the company pays dividends on the stocks that you own.
  • You can make money in the form of interest if you own bond fund ETFs.
  • ETFs that include real estate give returns in the form of underlying rents and capital gains on sales.

Here are some ETF portfolios worth considering. These include a variety of options based on potential returns and risk factors.

Aggressive portfolios, for example, offer good and quick returns but they can be very risky. Conservative portfolios, on the other hand, are less risky but do not offer exceptional returns.

You have to be sure about what you’re looking for before you make an investment.