The world of ETFs: a beginner’s guide
One of the most intriguing parts of cryptocurrency’s ongoing progress is how well it can connect with more traditional investing channels to provide new, more secure, and profitable opportunities.
A perfect illustration of this is how crypto investors are now attempting to leverage the expansion of exchange-traded funds (ETFs) by purchasing a Bitcoin ETF that tracks BTC. Aside from cryptocurrency, ETFs can provide cheaper operating expenses, more flexibility, greater transparency, and higher tax efficiency in taxable accounts than traditional open-end funds.
ETFs are one of the modern market’s opportunities. At the start of 2020, the market traded roughly $100 billion every day with a weighted average spread of just 1.7 cents or 2.1 basis points (bps). Overall, ETFs closely track their net asset value (NAV), providing investors and traders with low-cost access to thematic exposures and diversified baskets.
ETFs, or exchange-traded funds, at the beginning of the year, had a milestone birthday: it was 29 years ago when the world’s largest ETF debuted on Wall Street as the first U.S.-listed investment of its kind.
ETFs have grown in popularity and size during the last quarter-century. The total amount of funds invested in US-based ETFs grew by 34% four years ago, reaching a record $3.4 trillion by the end of the year.
But before we begin to go deep, let’s get familiar with several terms and concepts surrounding ETFs, which of course, would begin with the meaning of ETF.
What are ETFs?
An exchange-traded fund (ETF) is a collection of investments that are often linked to the performance of an underlying index. It’s also exchanged like a stock on the exchange so that you can buy and sell it.
For example, you can buy an ETF that tracks the S&P 500, a stock market index that contains a large amount of the market’s entire value and is widely used as a benchmark. (It monitors the stocks of 500 of the world’s largest corporations.) You can also invest in sector-specific ETFs, which hold equities from companies in specific industries, such as communications, utilities, and health care.
What is a bitcoin ETF?
You might be wondering how ETFs are connected to Bitcoin. Well, a Bitcoin ETF allows investors to speculate on the price of the world’s most popular cryptocurrency without having to buy it. This means users won’t have to learn the intricacies of buying and trading real Bitcoin, which entails several rigorous security and storage processes.
ETF vs. mutual funds
An ETF, unlike a mutual fund, is traded on an exchange (thus the name). That means you can purchase shares at any time during the trading day, at whatever price they are at the time of purchase. Mutual fund shares, on the other hand, can only be purchased at their net asset value price at the end of the trading day.
An exchange-traded fund (ETF) that invests in actual commodities such as precious metals, agricultural goods, and natural resources is known as a commodity ETF. An ETF that invests in commodities futures contracts or a specific commodity held in physical storage is known as a commodity ETF.
A gold ETF is an example of a commodity ETF. The gold ETF holds only gold as its primary asset. Exchange-traded funds are similar to individual equities in that they trade on a stock exchange.
The fund, on the other hand, has gold derivative contracts backed by gold. As a result, if you invest in a gold ETF, you will not actually own gold.
Now that we’ve gotten these terms and definitions out of the way, let’s briefly see how ETF works and the risks and benefits.
How to buy and sell ETFs
Shares can be bought using any investing account, just like individual stocks. You can specify the number of shares you wish to buy, the amount of money you want to invest at a specific time, or the current share price.
The most prominent advantages of ETFs are:
- Trading flexibility
- Risk management
- Tax benefits
- Lower costs
- Portfolio diversification
Although ETFs are still relatively new to the investment world, the advantages they offer over many fund investments should not be overlooked.
Finally, keep in mind that ETFs follow the market as a whole, so they are subject to the same volatility.