Well first off, what is an ETF? ETF stands for exchange traded fund and they are assets typically comprised of stocks from multiple companies bundled together. ETFs can also be made up of commodities, bonds, or a mixture of investment types. ETFs are traded on exchanges just like stocks are. The Standard and Poor’s 500 Index, or S&P 500, by far the most famous ETF. The S&P 500 represents the 500 largest companies and is often used as a measure for how the U.S. economy is doing.
What is the best ETF? There is no right answer for that. There are numerous different types of ETFs that you could potentially invest in such as bond (might include government, corporate, or state bonds), industry (track a particular industry such as technology, banking, or the oil sector.), commodity (gold, oil, etc.), and currency (Euro, Yen, etc.) ETFs. There are even inverse ETFs comprised of stocks you’re shorting.
So what exactly is a stock? Stocks are shares of a publicly traded company that people can buy and sell on exchanges like the NYSE and Nasdaq. Companies that want to sell stocks go through an IPO process where they are valuated and establish a number of shares they want to allow the public to purchase. Once a target IPO price is established and they can start being traded, then it’s up to the supply and demand of shares that drives stock prices up or down.
Now that we’ve clarified exactly what the difference is between the two, which is better? That depends on your strategy. Purchasing stocks gives you the opportunity to focus on the companies that stand out within their given industries or that you feel are undervalued. ETFs are good for the longer term and a good way to diversify your portfolio because they can give you access to many stocks across various industries.
I currently don’t have any ETFs in my portfolio but I am going to start researching them more. I’ve been keeping an eye on ARKK and ARKF, both are popular tech ETFs managed by famous investor Cathie Wood. What are your thoughts on ETFs vs. stocks? Leave me a comment and let me know. Follow my Twitter @VanceAlm where I’m constantly posting articles and blogs about news in the financial word.