If you're interested in investing, exchange-traded funds and index funds are great options, but you might want to consider learning more about the two and their differences before choosing where to invest your money.
Investing can be intimidating, especially if you're only starting out. With so many options available, choosing where to invest your money or a company to buy stock from can be quite daunting. So first, let’s define both terms.
An exchange-traded fund (ETF) is a type of fund that can be purchased or sold on an exchange, including a stock exchange. They usually have lower fees compared to other types of funds and have varying levels of risks you can choose from.
It trades just like a stock and like other types of funds, ETFs pull together money from investors into a basket of different investments such as bonds, stocks, and other securities. By putting the fund's money into different securities, ETFs can provide investors with diversification to help balance risk. Because it's traded on a stock exchange, they're bought and sold just like stocks and usually incur commissions and other fees.
Just like mutual funds, there are also different types of ETFs. Each one comes with different objectives. Some invest in a variety of stocks and bonds while some replicate the performance of a stock index like the Dow Jones Industrial Average or S&P 500.
Different ETFs offer different amounts of diversification. Those that focus on specific sectors typically offer less diversification compared to those built to replicate an index.
The fund provider has the underlying assets, designs a fund to keep track of their performance, and then sells shares in that fund to investors. The shareholders own part of an ETF, but they don’t own the underlying assets in the fund.
Nonetheless, ETF investors that keep track of a stock index may get lump dividend payments, or reinvestments for the stocks that make up the index. ETFs are designed to track the value of an underlying asset or index, but they also trade at market-determined prices that usually differ from that asset.
On top of that, factors such as expenses, longer-term returns for an ETF may vary from those of its underlying asset.
Index funds are investments made to keep track of the performance of a market index. They include several investments that tend to be diversified in securities across that index.
Index funds include both index exchange-traded funds and index mutual funds. These funds usually use a passive investing strategy. Their goal is to deliver returns similar to an index of investments. However, index funds usually give returns that are slightly lower than an index exchange-traded funds., mainly because of the fees associated with these funds.
To put it simply, index funds are designed to have a similar performance to that of a major market index. This is why they tend to be diversified in securities across that index and include a number of investments. Index funds can track different assets, including stocks and bonds. There are also index funds that follow commodities, currencies, and other assets.
It's good to take note that ETFs have no minimum investment requirement. This might be a better option for you if you don't have enough money to invest. It's also ideal to choose ETFs if you have plans in buying and selling them more actively, or if you want to invest in a specific market or industry since index funds usually just follow broad market trends without looking at their overall performance.
If you have enough money to meet an index fund's minimum requirement and want a less demanding investment requirement, then you might want to consider index funds instead. You can put your money little by little for your future or retirement and don't worry about it until you finally want to pull your investment.
Apart from ETFs and index funds, one easy way to save for your future plans, first house, or retirement is to join KiwiSaver!
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