What Is an ETF (exchange-traded fund)?
My Experience about ETFs
Investing is always a topic of great interest to me. Prior to writing this blog, I have tried many kinds of investment and accumulated some experience of investing. Nowadays, there are so many types of investment to put your money in and each kind of investment has its own pros and cons. I am always wondering if there is a suitable investment that is flexible and can be reliable in the long-term. After I had done a series of research and completed two essays on investment this semester, I found a flexible investment: exchange-traded funds (ETFs) which can also be used as an investment for retirement. Let’s see what are some advantages of ETFs.
Investment Threshold
The threshold of investment whether for people with a lot of investing experience or a novice investor is a factor that needs to be paid attention to before they invest. According to Picardo, E. (2020), “the low investment threshold for most ETFs—generally as little as $50 per month—makes it easy for a beginner to implement a basic asset allocation strategy, depending on his or her investment time horizon and risk tolerance” (para. 6). A low investment threshold provides a chance for people to flexibly adjust their investing strategies. For young investors who might invest all their money in equity ETFs because of their long investment time horizons and high-risk tolerance, they can shift their investment to a less aggressive investment mix such as investing less in equities ETFs and investing more in bond ETFs after they face some situations like building a family or buying a house. It is easy to see that a low threshold is a key attraction of ETFs for people to invest their money in.
Investment Choice
According to Silver, C., Chen, J., & Kagan, J. (2020), as of early 2020, there are more than 2,000 U.S.-based exchange-traded funds, according to data from research and consultancy firm ETFGI (para. 4). This extensive range of available ETFs offers a wide variety of investment choices for investors. Besides, investors can even build their portfolios within one ETF due to its diversification. According to Thune, K. (2019), “when building a portfolio of ETFs, an investor can easily allocate their investment assets to a wide range of investment categories. Most investors can build a diversified portfolio with as little as two or three ETFs but a range of 5-10 ETFs may be more appropriate for other investors” (para. 5). As you can see, the ranges for investors to invest in ETFs are extensive. It is easy to see that the diversification of investment options in ETFs is one of the prominent advantages of ETFs as an everyday investment.
Liquidity
The extraordinary liquidity of ETFs attracts abundant investors because it allows investors to retreat when markets are not favorable. ETFs can be traded whenever the owners want and do not have restrictions. “There are no restrictions on how often you can buy and sell ETFs. You can trade any number of shares, there is no investment minimum, and you can execute trades throughout the day, rather than waiting for the NAV to be calculated at the end of the trading day” (“How Mutual Funds, ETFs, and Stocks Trade”). Moreover, to some extent, the liquidity of ETFs also can be controlled by some investors as well. According to Artzberger, w. (2020), “while individual investors have little recourse when liquidity decreases, institutional investors who use ETFs may avoid some liquidity issues through buying or selling creation units, which are baskets of the underlying shares that make up each ETF” (para. 2). To sum up, the liquidity of ETFs provides investors with adequate security, which is excellent merit for some investors.
Under The COVID-19
Under the current COVID-19 situation, the stock market is very volatile, and it has made most of the ETFs suffered as well. Many investors lost a lot of money from their portfolios; however, there is an ETF, which is called an inverse ETF, providing a particular chance to make money while others are losing their money. According to O’Connell, B. (2020), “an inverse exchange-traded fund aims to generate positive investment returns by leveraging derivatives to gain steam when an underlying market index underperforms” (para. 5). Clearly, inverse ETFs provide a way to make money when the stock market decline or is not good for the market, or for most Main Street investors, but it is highly useful if investors are convinced the stock market will decline, and they have a way to make a buck or two off that decline, which is perfectly suitable underlying today’s situation.
Conclusion
To sum up, while people are seeking investments, they should prioritize considering ETFs because of their low investment threshold, a wide range of investment choices, and abundant liquidity. Although the vast majority of investment under the COVID-19 are suffering varying degrees of loss, inverse ETFs offer investors a unique way to avoid losing money from the rapid spread of coronavirus. During the COVID-19 outbreak, I joined a Japanese food donation program, which aims to provide free lunch and dinner for medical staff and patients in New York City’s hospitals. I understand that the COVID-19 crisis is a sad disaster, and I am grateful for essential workers who devote themselves to fight against this disaster. Besides, investors should keep a strong faith in the stock market because the US government is trying its best to help investors out of trouble. When the outbreak of coronavirus is over, ETFs are definitely one of the best investment options for investors.