If you are looking to invest in ETFs and don’t know where to start, you are not alone. Some people don’t even know what ETFs are, let alone how to buy ETFs. So, let’s put some clarity to the matter. ETFs, or exchange-traded funds are responsible for tracking a specific securities index. What this means is that one ETF stock may stand for as many as a few hundred companies encompassing one industry, region, or country. The main advantage of ETFs is that there is no large initial investment required to purchase them, which is not the case with regular index funds. Before you buy ETFs, there are a few things you should know.
First, you should learn about the different types of ETFs available out there, of which there is an abundance. They can be grouped according to sectors, indexes, regions, or styles. At first all this may seem overwhelming, but if you understand the different types of ETFs, it will be easier for you to pinpoint the right ETF to fit your investment strategy.
If you haven’t worked out your investment strategy yet, then you should do so. Why do you want to invest in ETFs? Is it because you want to gain exposure to a particular sector in the market? Are you looking for something to fall back on if your foreign investments go wrong? Before you decide to include ETFs in your portfolio, it is important to understand why you are doing it, because then you can determine your investment strategy.
Next, you should know what kind of effect your ETF investments will have on your tax return. Another benefit of ETFs is that they tend to come with tax advantages that other investment types don’t. Because of the ETFs’ nature, the taxes on capital gain are not realized in the same manner as with other investments. This is not the case everywhere, however, so it’s important to check and know what you’re dealing with in terms of taxes.
An important tip on how to buy ETFs is to diversify your portfolio of ETFs. This is very easy to do, because it is possible to buy these securities in small amounts. This means that you really only need minimal start-up capital to have a relatively diverse portfolio. It is recommendable that you keep only about 10 percent or less of your investment in one index to minimize the risk of losing everything.
Also, you may want to look into investing in foreign index ETFs to have a broader scope of opportunities. If you choose to go foreign, it is recommendable to buy general ETFs as opposed to specific industry ones. For example, if you want to buy a Japanese ETF, it is far better to invest in EWJ Japan, which covers hundreds of companies in Japan, because this is a lot less risky than investing in a Japanese ETF that is industry-specific.
