A traditional mutual fund is priced at the end of the day according to its net asset value. An ETF is also a fund, but it trades like a stock on the stock market.
Most ETFs are passive, meaning there is not a fund manager and research team determining which stocks to buy based on where they think the stocks are going. ETFs allow the investor to create a diverse portfolio, which can include a wide range of market caps, sectors, strategies and asset classes.
Then there are ETFs for when you really want to bet heavily on the direction of the market or a sector. E.g. if you were bullish on the financial industry, you could buy the Direxion Daily Financial Bull 3X Shares ETF), which should move roughly three times as much as the Russell 1000 Financial Services Index. If you believe, the overall stock market will go down, you could use, the ProShares Short S&P 500 that will trade inversely to the S&P 500. So if the S&P 500 falls 5%, the ETF will rise 5%. If you feel ultra bearish and think the markets will tank, you could buy the ProShares UltraPro Short S&P 500, which will return 3x the inverse performance of the S&P. So if the S&P falls 5%, the ETF should increase by 15%.
There are ETFs for nearly any aspect of the market that an investor would want to place a bet on. Basically, if you can come up with an investment idea, there is probably a way to trade it through an ETF.
ETFs provide flexibility, liquidity and a wide range of ideas, whether you’re a long-term investor or a trader looking to participate in the move of a specific sector.
ETFs are great to invest in, if you don’t want to own individual stocks.
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