Exchange traded funds (ETFs) have become one of the most popular investment vehicles in recent years, mainly because of the low cost of the investment process, the easy entry, the investment risk is lower than the investment unit and the return is attractive. However, it is sometimes difficult to assess whether an ETF is a good investment tool.
What does the ETF offer?
ETFs follow indices that already exist in the market, such as tracking the performance of the S & P 500 index, or following an index of equities in the same sector, such as the SPDR Technology ETF. Investors can track specific sectors, regions, countries or indices and spread risk by buying ETFs. Many ETFs are more specific and follow smaller markets, such as cryptocurrencies.
How do investors decide when to invest in a specific target without extensive investments via the ETF?
Forbes visited Janelle Nelson, a 23-year-old portfolio analyst at Royal Bank of Canada, who has a wealth of large investments and finances.
Nelson recommends focusing on the liquidity of the underlying securities and ensuring that the assets are easily tradable. She pointed out that sometimes in a single ETF the share of a single stock is as high as 30% or 40%, so it could make more sense to buy the shares right now.
If you want to enter a specific region or country, ETF is usually a good choice, for example, US investors may not be able to buy Samsung Electronics shares easily, but they may choose to buy South Korean ETFs, such as iShares MSCI. Korea ETF, Samsung is in the fund represented more than 22%.
How do you know if a particular ETF is of good quality?
First, you can investigate the promoters or brokers behind the ETF to see if the money is stable. ETF.com suggests that the sponsor's money must be at least $ 50 million, otherwise the ETF will fail. If an ETF can not attract enough money, the ETF is closed, which may lead to an increase in the tax on investors or a risk of reinvestment.
In terms of liquidity, sponsors must measure market demand and estimated return rates before issuing ETF products, and supervisors need time to complete the regulatory procedures.
When profit is the primary goal, Nelson points out that you should not be a person who comes too late. Buying an ETF that follows a certain subject is too late to enter the market because the subject may have been speculated, causing the price to continue and many of the novice investors do not usually hold the ETF for too long if they want to play. ETF prices will fall.
The above types of ETFs are Bitcoin ETFs or ETFs that follow the panic index VIX, which Nelson says is usually the most risky ETF for those who seek to exaggerate market volatility or follow narrow markets .
The question to think before buying an ETF
Therefore, when purchasing an ETF you must be prepared to know whether the individual companies that make up the ETF relate to the reasons why you want to invest in the sector.
And ask yourself the following questions:
Can this investment produce the expected or expected results? Earning money may not be the only goal. The goal may be that the ETF is in line with the general investment philosophy, or can be integrated in the investment management portfolio to achieve risk diversification.
If a certain ETF or other financial product sounds too good to be true, the truth may be questionable because there is no free lunch in the world.