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-Moomoo News Team
Editor: Debby
To many novice investors and busy investors, the most difficult part is finding a good company to invest and realize good returns.
Therefore, Warren Buffett who just turned 90 years old on last Sunday, famous for his successful career picking stocks, had shared a tip for his believers. He said most investors are better off with a simpler approach that's still very effective: Invest in index funds.
In my view, for most people, the best thing to do is to own the S&P 500 index fund.
-Buffett said in Berkshire Hathaway's virtual annual meeting on May 2.
So what is an Exchange Traded Fund (ETF)?
An Exchange Traded Fund(ETF) is a security which can be bought on an exchange, meaning that it is easily bought and sold.
There are numerous variations but the majority are index trackers. Depending on which index the ETF is supposed to track, it will just buy the underlying investments of that specific index.
This means that there is no fund manager actively trying to pick the best investments. It is basically a computer doing it and its performance will be very similar to the index it is tracking(passive funds).
For example, $S&P 500 index(.SPX.US)$ was up9.16% this year to date and the well-known $SPDR S&P 500 ETF(SPY.US)$ gained 10.68% during the same period.
The idea is that you get the index performance at a very low annual cost (0 – 0.5% normally) as there is no active fund manager to pay. It also gives you the diversification of the index, in our example these 500 stocks of S&P 500 Index.
For you as an investor, it might be appealing because you are immediately spreading your risks due to the ETF consisting of 500 American stocks and you don't have to buy them individually yourself. It is a diversified investing alternative.
In conclusion, an ETF is a security that consists of a selection of securities (often stocks) with individual weights based on the index rules of the index the ETF is aiming to track. A computer does the work and hence the cost of owning this kind of security is normally very low compared to a normal mutual fund. Low cost may have a massive impact on the value of your investments over time.
An exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock. ETF share prices fluctuate all day as the ETF is bought and sold.
ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.
Source: actiontohappyhealthywealthy, investopedia