If you are new to investing money in the stock market, one way to get started is to invest in exchange-traded funds or ETFs. However, when it is time to create your investment portfolio, it is best to include the top etfs proven to be long-term performers. Here are some of the things you need to know before starting your investment.
What are ETFs?
An exchange-traded fund or ETF is an investment product regulated by the Securities and Exchange Commission (SEC). ETFs can act as an open-ended investment company where investors can pool their money to create a diversified investment portfolio. When you are investing in an ETF, you buy shares of the investment company (the ETF).
ETFs perform similarly to stocks, where their prices continuously fluctuate as they are being traded. Similarly, you can purchase shares of ETFs whenever the stock market is open.
What is an Expense Ratio?
When you invest in exchange-traded funds, the investment manager will charge you with fees known as an expense ratio. This ratio will give you an idea of how much of your investment in a specific fund will be deducted to cover the fees. Expense ratios are computed by the operating expenses of the fund divided by its average assets.
A typical expense ratio for an actively managed investment portfolio lies somewhere between 0.5 to 0.75 per cent. However, since ETFs are passively managed, they will have a lower expense ratio. The average expense ratio for ETFs is around 0.44 % which means that for every $1000 you invest in top ETFs, $4.40 will be deducted from it annually.
How to Choose the Right ETF?
As of 2020, there were more than 7600 listed ETFs globally, with 200 ETFs being listed on the Australian Stock Exchange. Choosing the right ETF to invest in may be challenging for newbie investors. Therefore, it is best to narrow down your selection by choosing the top etfs to suit your portfolio and investment strategy. Here are some things to consider.
- Trading Activity. Trading activity is an indication of the number of shares being traded daily. If an ETF has large volumes of trades per day, it is liquid, and you can easily sell your shares if you like the price. A large trading volume will also give you an indication of how easy it is to exit that investment since you can assume that there will be a lot of traders willing to purchase your shares.
- Level of Assets. How many assets does the ETF have? It is best to choose an ETF with at least $10 million in assets. Top etfslisted in the ASX will most likely have large levels of assets.
- Market Position. When investing, choose ETFs with a high market position, which means that they are considered first movers. First movers will have a competitive edge since they are the first to market a product or service and are also the first to develop strong brand recognition. Examples of first-mover stocks are Amazon and eBay. So, when investing in ETFs, choose one that has multiple first movers in the portfolio.
- Underlying Index or Asset. An underlying asset or stock is the stock itself upon which the price is based on. Knowing the value of the underlying asset will let you know the value of the options up until the expiration of the contract. Knowing the value of the underlying asset will let you know whether to exercise your options or not.
For example, you purchased an option of 100 shares with an underlying asset of $2 per share; in this case, the option will cost $200. If the underlying asset reaches a price of $5 per stock, you can either sell your option (100 shares) for $500 and get a profit of $300 or purchase another option (100 shares) to hope that the underlying value asset will increase further.
Investing in stocks will involve the risk of losing money. However, if you know how to choose the top etfs for your portfolio, your money will be safe and grow.