An ETF, or exchange-traded fund (ETF), is an asset that tracks a particular set of equities, similar to an index. Unlike an index (which is just a number), an ETF trades just as a regular stock would on an exchange.
Examples of ETFs include:
- the SPDR S&P 500 (SPY) which tracks the S&P 500 itself
- SPDR Dow Jones Industrial Average (DIA), which tracks the Dow
- the Energy Select Sector SPDR Fund (XLE) which tracks energy stocks
- the Information Technology Select Sector SPDR Fund (XLK) which tracks tech stocks
- and many others.
How can I use an ETF when I invest in stocks?
- You can use it as a passive investment tool. An ETF helps to diversify your portfolio by allowing you to gain exposure to a basket of equities without actually having to buy individual stocks.
- You can use it as an active investment tool by taking up a long position on specific sector ETFs that you believe will outperform the market. During market downturns, you can make use of other types of ETF stocks such as inverse ETFs to profit from falling prices of a group of equities and leveraged ETFs to amplify your returns on an underlying group or sector of equities.
- You can make use of low cost to gain higher returns. ETF stocks usually charge lower fees of around 0.1-0.2%, which is much lower than actively managed funds like hedge funds that charge about 2% annual management fees of their total asset under management (AUM) plus a 20% performance fee from any profits.
- You can also use ETFs to find new stock ideas: most ETFs have their stock composition public.
Debt to Equity Ratio
Used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.
Profit is the financial benefit realized when revenue from a business is higher than the costs and taxes involved in operating that business.
Alternative investment class composed of funds that invest directly in private companies or that buy public companies and take them private
Time of declining economic activity, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and sales.
A stimulus package is a coordinated effort by the government to increase spending and investment to "stimulate" an economy out of a downturn.
Shorting a stock
Trading strategy that tries to take advantage of the decline in a stock price by borrowing a stock and sell it now while planning to repurchase it later for a lower price.
Market-capitalization-weighted index tracking the performance of the 500 largest U.S. companies