Exchange Traded Funds (ETFs) & ETF Trading
Exchange Traded Funds (ETFs) are securities traded on stock exchanges, similar to stocks. An ETF is an investment fund that invests in a basket of securities such as stocks, commodities, bonds, or a mixture of several other investment types. An ETF creates a portfolio of these varying asset types and amounts to offer shareholders a way to gain exposure to the fund’s overall portfolio at the cost of a single share. As a result, purchasing an ETF can be a cost-effective way of diversifying your portfolio or simply gaining exposure to a particular segment of the market. ETFs sell on the open market, meaning that their price is set by supply and demand, which often fluctuates throughout the day. While some ETFs hold thousands of different stocks, other ETFs may focus on a specific industry or market sector. A few different ETFs include real estate ETFs, gold ETFs, healthcare ETFs, and banking ETFs.
Exchange Traded Funds Definitions and Frequently Asked Questions
Expense Ratio
An ETFs expense ratio is the percentage of the fund’s assets that are deducted every year in order to cover the cost of maintenance and management of the fund. However, some ETFs like those that are passively-managed have a relatively low expense ratio. Since most passively-managed funds are designed to merely track a certain index such as the S&P 500, the cost of maintenance is typically lower than that of an actively-managed fund. Of course, it is always important to take a look at the ETFs prospectus to not only understand how the fund is managed but what its expense ratio is as well.
What is a bid/ask spread?
The bid/ask spread is the difference between how much the buyer is willing to pay for a share (the bid) and the price that a seller is willing to accept for the share (the ask). Normally, the more an ETF is traded, the smaller the bid/ask spread becomes.
How do I purchase an ETF?
Each of our advisors at Florida Financial are knowledgeable on the different types of ETFs available and can help guide you to make sure a particular ETF is the right choice for your portfolio. Contact us today for a free consultation.
Note: All investments involve potential risks, including loss of principal. Please consult with your professionals regarding your specific situation prior to making any investment decisions.
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