Exchange-Traded Funds (ETFs) have become incredibly popular over the last few years. In many ways, ETFs are like trackers. Instead of investing directly in a commodity, market or index, they allow investors to put their money in a fund that mirrors their chosen market. Investing in this manner is usually less expensive and more flexible than investing directly.
The FTSE ETF mimics the performance of the FTSE. Investors can choose between a range of ETFs, some of which are based on the FTSE 100, others the 250 or the All-Share index. Unlike trackers, ETFs are traded as if they were individual stocks. ETFs can be bought and sold through brokers, offering increased liquidity and more flexibility than other forms of investment.
The Benefits of ETFs
The best thing about ETFs is that they offer investors on a budget an opportunity to access funds that they would not otherwise be able to enjoy. In addition, ETFs can be traded quickly and frequently, making them a good option for frequent traders who want to take advantage of fluctuations in the daily market. ETFs are a simple and flexible option that will suit a wide range of investors.
A Word of Caution for Novice Investors
Funds such as FTSE ETFs may be bought on leverage. This means that you essentially “borrow” money to invest in the fund. A leverage of 10:1 would mean that you borrow ten times your investment. If your investment goes up, you keep ten times the profits. If it goes down, then you will lose ten times the price difference. If the fund loses only a small amount of its value, then this is not too much of an issue; however, if the market crashes, you could end up owing the company money, unless you place a stop-loss order to ensure your fund is sold before it loses too much value.
It’s important to note that an ETF will always slightly under-perform a raw investment. If you have the capability to invest directly in the FTSE and are willing to handle that investment yourself you would make more money than you would relying on an ETF because of the overheads that the company faces in managing the investment. The fees associated with investing are shown in the tracking error, which is the difference between the price of the ETF and the price of the associated investment. Of course, you may be happy to pay this price for the convenience and flexibility of the ETF.
Before you commit any money into an investment, be sure to seek expert advice. Remember that the value of investments can go down as well as up. Do not invest money unless you are willing to accept the possibility of the fund losing a significant amount of its value.