Earn More Money, InvestingApril 19, 2021May 16, 2021

The Benefits of Investing Into an ETF

In the world of investments, there are many types of options. Stocks, options, mutual funds, REITs, real estate, etc. However, they all have their various benefits, disadvantages, purposes, and intentions. Therefore, diversifying depending on your goals can be the best option. However, you should always do your due diligence before investing. If you invest without having any prior knowledge, you’re basically gambling. With that being said, this article will be about ETFs. Not only about what an ETF is but how it’s beneficial.

For many people, investing is scary. However, this fear stops them from making informed decisions that can increase their income and help them live a financially free life. Think of this article as a baby step to help you towards your path of investing and living a financially free life. In this article, we’ll discuss what an ETF is, the difference between ETFs/stocks, and if you should invest in an ETF or not. As usual, the goal is to give an objective outlook on what the ETF is, its purpose, and how it’ll benefit you. This is, in my opinion, the best way for you, the reader, to make an informed decision.

What Is An ETF?

An ETF is an Exchange-traded fund. ETFs are securities that involve an amalgamation of other investments. Such as stocks. This means, when you’re investing in an ETF, you’re investing in a collection of stocks. Doing this mitigates risk and has a more sustainable return. While certain ETFs can focus primarily on one sector, the investment strategies vary. This means that varying ETFs can have different strategies on how they choose to invest. T

his strategy can give you a high-risk/high-reward benefit. However, the opposite is also true. There are ETFs that focus on low risk with a lower reward. You may be thinking that this sounds similar to a mutual fund. That due to the fact that they share many similarities. However, ETFs are bought and sold throughout the day at certain prices, similar to stocks. However, there are some glaring differences between individual stocks and ETFs. These differences we will get into later on in the article.

A commonly traded ETF, which you may have heard about is the S&P 500 or Standard & Poor 500 index ($SPY). This is an index that tracks and trades the top 500 publicly traded companies in the United States. Of course, there are many Canadian ETFs that are worth your investment. However, none are more well known as S&P 500. Furthermore, the S&P 500 is looked at as one of the best and most reliable ETFs that you can invest in. Another large benefit is that if you’re in Canada, most platforms will let you invest in the S&P 500. Therefore, you won’t miss out just because you’re not in the country. Above is an all-time growth chart of the S&P 500. As you can see, there is a steady growth rate. There are times where it dips. However, it always bounces back.

ETFs Vs. Stocks

The differences between ETFs and stock are pretty well known. An ETF is a collection of stocks and bonds and a singular stock if you owning a percentage of a company. Due to this fact, individual stocks tend to be extremely volatile, relative to an ETF. There will be times where you see stocks skyrocket overnight, sometimes hundreds of percent. This typically is not possible for an ETF. This is due to the fact that it’s based on many different stocks. It adds diversity. Diversification, while it doesn’t allow you to make exponential gains, it mitigates large losses.

If you’re looking to be a more passive investor, ETFs will be more up your alley as it requires the least amount of attention.

Lastly, is to discuss the different types of ETFs. Many beginning investors won’t know that there are a few different types of ETFs, not all fall under one type.

First is the Bond ETF. This is an ETF that can include various types of bonds such as corporate, government, state, and local bonds.

The second is an Industry ETF. This is an ETF that specializes in certain industries such as fitness, finance, tech, gas, etc.

The third is Currency ETFs. These ETFs invest in foreign currencies such as the British Pound or Euro.

The fourth the Commodity ETF. This is an ETF that invests in commodities such as oil, gold, silver, etc.

The last ETF is Inverse. Inverse ETFs are a bit trickier by nature. Therefore, it carries slightly more risk than other ETFs. In short, an inverse ETF attempts to earn money by shorting the stock. Essentially, the ETF is trying to profit off the decline of stocks. For those who don’t know, shorting is the practice of selling a stock high, hoping for a decline, then purchasing it back at a later date for a lower price. Many people do this and it’s an excellent way to earn money if you know what you’re doing of course.

Should You Invest In An ETF?

Whether or not you should invest in an ETF is completely up to you. However, many investors, especially wealthy ones, preach investing in ETFs. It’s a solid form of passive investing and provides a larger value than most high-interest savings accounts. While it is not a good idea to invest all your money into it, a good portion of your income should go towards saving and investing. However, the key to investing in ETFs is to not make one fund your only investment. Diversifying is key when it comes to investing. Therefore, you will want to find sectors and ETFs you understand. Therefore, you can earn the most amount of money.

For example, let’s say you want to invest in industry ETFs. However, you are only knowledgeable in two specific fields, health, and tech. You can find various ETFs that represent those sectors and allocate your funds accordingly. You’ll mitigate risk by having a more diversified portfolio. Furthermore, you understand the fields which mean there is a higher chance of you making a solid return. If you throw in the S&P 500 into the mix along with other investments such as real estate, you’ll see your net worth grow tremendously over time.

Some people may want an example of what can happen to their money. Therefore, I will give you an example. If you were to save $500 per month for 10 years, right now you would have approximated $60,000, CAD or USD, it doesn’t matter. However, what if you took that $500 per month and invested it into an ETF such as the S&P 500. You would have approximately $120,000 over the course of the 10 years. This means that your money would more than double if you invested it rather than saving.

While the exact amount is speculative, the overall point is still there. Investing in an ETF, is a must, even in a small sense, for the growth of your portfolio. Furthermore, you do not need to invest $500 every month, knowing your budget and investing is key as well. The last thing you want to do is invest money you don’t have. However, an ETF is a liquid investment. This means that you can pull your investment anytime during business hours.

Shameed Chris Khan

Shameed is just a man on a mission to help those around him gain financial success. Obsessed with writing about all things finance, this GTA native is constantly learning and sharing his experiences with others.