WHAT ARE ETFs?
Exchange-Traded Funds popularly known as ETFs are investment funds that are traded on stock exchanges. Although similar to mutual funds, they are being traded like stocks. They are typically composed of a basket of stocks, bonds, commodities, or other securities. They offer investors greater flexibility and lower costs than mutual funds. ETFs provide investors with exposure to several asset classes and strategies like currencies, commodities, fixed income, international markets, multi-asset, equities, etc. It also allows investors to keep track of country-specific, asset-specific, and global records and acquire investments.
HOW DOES ETF TRADING WORK?
Exchange-traded funds enable you to invest in multiple securities at the same time. They can hold a large variety of stocks across several trades. Unlike unit trust funds, ETFs are designed to track an index, such as the S&P 500, or a sector, such as technology or energy. When you buy an ETF, you are buying a share of the fund, which gives you a proportional ownership of the underlying assets.
ETF investors make money in two ways, capital appreciation, and dividends. In capital appreciation, you make money by selling the ETFs after the prices have gone up. While dividends are paid by some ETFs on a half-yearly or yearly basis.
An Exchange-Traded Fund’s trading price majorly depends on demand and supply. The price increases if more people are interested in buying the ETF than selling it, and reduces if more people are interested in selling the ETF than buying. ETFs also have Net Asset Value (NAV). NAV is the amount of the ETF investments left after subtracting the liabilities and dividing by the outstanding shares. ETFs can be traded all day and because of this, the price of ETF stocks fluctuates on trading days as the stocks are sold and bought.
BENEFITS OF ETF TRADING
1. ETFs allow you to invest in various assets all at once with little capital. With this diversification, if one of the investments underperforms, its effect on your portfolio is reduced.
2. ETFs incur lower fees as they do not require active management.
3. ETFs are a safe and reliable investment option because they are highly regulated by the Securities and Exchange Commission (SEC).
4. Stocks are automatically picked out for you so you would not have to worry about selecting the right stocks to invest in.
5. Since ETFs are sold like stocks, it is fast and effortless to buy and sell.
TYPES OF ETFs
1. Equity ETFs
These ETFs track a particular stock index, such as the S&P 500, or a sector of the stock market, such as technology or healthcare.
2. Bond ETFs
Bond ETFs track a particular bond index, or a sector of the bond market, such as high-yield bonds.
3. Commodity ETFs
They track a particular commodity, such as gold or oil, or a sector of the commodity market, such as energy or agriculture.
4. Currency ETFs
Currency ETFs track a particular currency, such as the U.S. dollar or the euro.
5. Inverse ETFs
Inverse ETFs are designed to move in the opposite direction of a particular index or sector.
6. Leveraged ETFs
These ETFs are designed to provide a multiple of the return of a particular index or sector.
ETF TRADING IN NIGERIA
Exchange-trading fund (ETF) is one of the fastest-growing asset classes in Nigeria. You can trade stocks, commodities, and currencies through online brokers or, the Nigerian Stock Exchange. To get started, you will need to open an account with a broker or the Nigerian Stock Exchange and make a deposit. When you have an account, you can start trading. Some ETF trading platforms available in Nigeria are;
1. Nigerian Exchange (NGX): It is the dominating ETF market in West Africa based on listed products, turnover value, and market capitalization. Its major benefits are outstanding speed and efficiency.
2. E-trade finance: This platform provides an option for buying pre-built portfolios.
3. Fidelity investments: Offers commission-free ETFs. It also provides ETF investment ideas based on your goals (income or growth).
Others include; Stanbic IBTC brokers, Brainy trading, FXTM, Fidelity investments, Vanguard, E-trade financial, Ally invest, etc.
HOW TO BEGIN
1. Research ETFs: Research different ETFs to determine which ones fit your investment goals and risk tolerance.
2. Open a Brokerage Account: Open a brokerage account with a broker that offers ETFs. A brokerage account is an investment account for trading stocks. When choosing a broker, consider the authorization, commission, administrative expenses, trading price, and it’s performance.
3. Fund Your Account: Fund your account with the amount of money you want to invest in ETFs.
4. Place an Order: Place an order to buy or sell ETFs through your brokerage account.
5. Relax: There is no need to constantly monitor the performance of your ETF investments. But you can access the information whenever you want to, from your brokerage’s website.
WHAT ARE THE RISKS IN ETF TRADING?
1. Market Risk: ETFs are subject to the same market risks as stocks, meaning that their prices can rise and fall due to changes in the overall market.
2. Liquidity Risk: ETFs may not always be as liquid as stocks, meaning that it may be difficult to buy or sell them at a given time.
3. Tracking Error Risk: ETFs may not always track their underlying index as closely as expected, resulting in a tracking error.
4. Counterparty Risk: ETFs may be subject to counterparty risk, meaning that the issuer of the ETF may not be able to meet its obligations.
5. Tax Risk: ETFs may be subject to different tax treatments than stocks, which could result in higher taxes for investors.
CONCLUSION
A single ETF stock can hold several investments and does not require constant monitoring. ETFs are highly liquid, meaning investors can easily buy and sell them on the stock market. It is the best for new investors in the stock market since they are less costly and have a lower risk compared to individual stocks.
All ETF trading operations are done through online platforms, giving you access anytime and anywhere.