{"id":1954,"date":"2022-07-03T04:15:05","date_gmt":"2022-07-03T04:15:05","guid":{"rendered":"https:\/\/blog.ark7.com\/?p=1954"},"modified":"2023-05-18T03:22:52","modified_gmt":"2023-05-18T03:22:52","slug":"etf","status":"publish","type":"post","link":"https:\/\/ark7.com\/blog\/learn\/glossary\/etf\/","title":{"rendered":"ETF"},"content":{"rendered":"
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What is an ETF?<\/b><\/h2>\n

ETF stands for \u201cexchange-traded fund\u201d. It\u2019s an investment vehicle that contains a variety of assets, such as bonds, stocks, and real estate. The value of an ETF fluctuates throughout the day as investors buy and sell. This makes ETFs different from mutual funds, which only change prices when the market closes.<\/span><\/p>\n

Because ETFs hedge against risk by investing in multiple assets and let people trade throughout the day, many experts see them as a balance between trading individual stocks and buying mutual funds.<\/span><\/p>\n

ETFs contain a variety of assets owned by the fund provider. The assets in the ETF can include a broad range of options, including stocks, precious metals, bonds, and currencies. The fund provider uses money from investors to purchase underlying assets. In return, individual investors and institutional investors receive payments based on the ETF\u2019s performance.<\/span><\/p>\n

The value of an ETF doesn\u2019t always correspond to the precise value of the underlying assets within the fund. Instead, the ETF\u2019s value can increase and decrease according to market interest. In that way, its value works much like shares of a company. When a lot of investors buy shares of, say, SPDR S&P 500 ETF Trust (SPY), the price goes up to reflect the growing interest. When investors start selling their shares, the ETF\u2019s price drops.<\/span><\/p>\n

What affects an ETF\u2019s value?<\/b><\/h2>\n

What makes the value of an ETF go up or down? Practically anything can influence the price of an ETF\u2019s shares. If the ETF has a sizable investment in a company that has a disappointing quarter, the price might decrease. If an ETF hires a new manager who has a long history of success, more investors can feel encouraged to buy. That drives the value up.<\/span><\/p>\n

Keep in mind that ETFs usually contain dozens, if not hundreds, of assets. Because of that, an ETF probably will not lose too much of its value just because one company\u2019s stock falls. It can happen, though\u2014imagine that a fund manager sees extraordinary potential in Ford stock. In response, they dedicate 20% of the ETF\u2019s funds to buying Ford shares, which is fine until Ford releases a product that fails. Suddenly, Ford shares fall and drag the ETF\u2019s value down with them.<\/span><\/p>\n

When comparing ETFs, it often makes sense to look for plenty of diversity within the fund. More diversity adds balance and reduces risk. As long as the overall economy performs well, an ETF with diversified assets should maintain most of its value even during trying times. Remember, though, that investing never comes with a guarantee.<\/span><\/p>\n

What are the biggest ETFs?<\/b><\/h2>\n

Even experienced investors can find it challenging to decide which ETFs to choose. There are so many options that you might feel overwhelmed while exploring your opportunities.<\/span><\/p>\n

It can help to focus on certain types of ETFs. For example, some ETFs invest heavily in the technology sector. Other ETFs put their money in real estate. If you feel particularly attracted to a certain sector of the economy, you might want to put your money in an ETF that shares your interest.<\/span><\/p>\n

You might also want to focus on buying into some of the biggest ETFs. While not always the case, large ETFs tend to perform well because they have experienced managers and plenty of capital.<\/span><\/p>\n

Some of the biggest ETFs include:<\/span><\/p>\n