Placeholder Image

Subtitles section Play video

  • [MUSIC PLAYING]

  • An Exchange Traded Fund or ETF is an investment fund

  • that trades like a stock.

  • ETFs, like other types of funds, pull together

  • money from investors into a basket

  • of different investments, including stocks, bonds,

  • and other securities.

  • By spreading the fund's money into different securities,

  • ETFs can generally provide investors with diversification,

  • which can help balance risk.

  • And because ETF shares are traded on a stock exchange,

  • they're bought and sold like stocks

  • and usually incur commissions and other related fees.

  • Just like there are a variety of mutual funds,

  • there are a variety of different ETFs,

  • each with different objectives.

  • Some ETFs invest in a variety of stocks and bonds.

  • Some replicate the performance of a stock index,

  • like the Dow Jones Industrial Average or S&P 500,

  • and others tracked the performance

  • for a particular market sector, like technology

  • or pharmaceuticals.

  • However, different ETFs offer different amounts

  • of diversification.

  • For example, ETFs that focus more on specific sectors

  • typically offer less diversification

  • than those that are designed to replicate an index.

  • Let's look at an example of investing in an ETF.

  • Suppose an investor wants to make a diversified investment

  • that is designed to mirror the performance of a major stock

  • index like the S&P 500.

  • After researching different ETFs and finding

  • the one he wants based on his objective,

  • he purchases shares of it through his broker,

  • just like he would an individual stock.

  • Now that he owns shares, the investor

  • has a stake in each of the fund's basket of investments,

  • while only having to purchase one ETF.

  • Participating in the wide market with only a single purchase

  • instead of multiple purchases can save an investor research

  • and analysis time.

  • So how can an investor potentially achieve

  • a positive return from the ETF?

  • Similar to a stock, he can earn a return two ways--

  • a rising ETF market price and dividends.

  • Typically, if the value of the ETF's investments increases,

  • so does its price.

  • If our investor purchased a hypothetical ETF at $40

  • and a year later it was selling for $50,

  • our investor could profit $10 per share

  • by selling his position.

  • Of course, if the ETF's price dropped,

  • our investor would have lost money

  • if the position was sold at the lower price.

  • Because many ETFs are traded on a stock exchange,

  • they can be bought and sold throughout the day.

  • However, not all ETFs are widely traded,

  • which can cause difficulty when trying to fill orders.

  • Now, compare this to a mutual fund.

  • Most mutual funds are only priced and traded

  • at the end of the day.

  • Separate from changes in price, our investor

  • could potentially gain income if the ETF pays its investors

  • a dividend, which is a payout of part of the fund's earnings

  • and capital gains.

  • Not all ETFs pay dividends.

  • Many Instead reinvest earnings into the fund's holdings.

  • One of the ways to tell whether a fund pays dividends

  • is to look at what's called its dividend yield.

  • This yield is the amount that the fund pays out

  • compared to the current market price of a share.

  • ETFs have other attractive qualities.

  • While most mutual funds require a minimum investment, which

  • can be substantial, an ETF investor

  • can just buy a single share plus any commissions and fees.

  • Also because most ETFs aren't actively managed,

  • they typically have lower management fees

  • than mutual funds.

  • There is a wide variety of ETFs that attempt to track assets,

  • like corporate bonds, stocks in remote countries,

  • commodities, and even currencies among many other investments.

  • While these assets carry unique risks, the ETFs that track them

  • offer investors a practical way to analyze

  • and potentially find opportunities

  • in a number of markets.

  • Want to learn more about ETFs and other investments?

  • Continue exploring premier education

  • brought to you by TD Ameritrade.

[MUSIC PLAYING]

Subtitles and vocabulary

Click the word to look it up Click the word to find further inforamtion about it