WHAT IS AN ETF ?

Hi guys, here I want to talk to you about ETFs. So what is an ETF? The letters E-T-F stand for Exchange Traded Fund and represent a collection of investments that's traded on the stock market exchange like a single stock.

ETFs are similar to mutual funds in sense that they both have fund in the name and that typically refers to having a collection of investments under a single umbrella that you can buy units or shares of. Like a mutual fund, an ETF has a fund manager. However, they don't cost as much, which is what makes ETF so attractive to investors. Where you'll typically pay anywhere from 1%t of 5% in MER fees on your mutual funds, you'll pay less than 1% for the same on an ETF. Often, it's less than 0.5%.

 This way, you enjoy the same diversification of your portfolio, reducing your risk and increasing your passive income, but at a much lower cost. This is why ETF are so popular and so important for investors to have in their portfolio. Unlike a mutual fund, your ETFs are traded in real-time and you have to buy complete shares of the ETF. What this means, is when you purchase a mutual fund you usually do so in units and you can buy partial units of your mutual funds. That means if a mutual friend unit costs $20, but you only have $15, you can still buy 0.75 units of the mutual fund. However, if a share of an ETF cost $20, you have to have $20 in order to buy one share of the ETF -- you can't buy any partial units.

Unlike a mutual fund, in order to buy ETFs, you have to have a brokerage account. This is different than your bank account and you have to set one up with a brokerage. If you bank with a large bank, sometimes they will have their own brokerage, but often you have to go outside of it. In order to open a brokerage account you have to be at least 18 years old, sign lot of paperwork, and normally have at least a $1,000 to seed that account. When you're buying and selling ETFs, you're making the decisions. There isn't an advisor to guide you. You're responsible for choosing your asset allocation and executing your trades, as well as protecting your portfolio from taxes. This is why less people choose ETFs than mutual funds.

The financial literacy barrier to get into trading ETFs is a little higher, but the benefits are totally worth it. You can have a fully diversified stock portfolio with only a small collection of ETFs because there are ETFs for everything. When I say that, I really mean everything. You can buy ETFs that are all dividend-paying stocks, you can buy ETFs that are all international stocks, you can buy ETFs that are specific to a certain industry like real estate or oil, and you can even by ETFs that contain other investments like corporate or government bonds.

In the past, if you wanted to build a diversified stock portfolio, you would have to buy all the different individual stocks yourself. This means you would have to choose some consumer retail stocks, some natural resource stocks, some technology stocks, and try to get the balance exactly right in your investment portfolio. Stocks are expensive. Some companies trade at over a $100 a share, which means you need a lot of money to adequately diversify your stock portfolio. When you purchase an ETF, someone has already done that diversification for you. When considering ETFs for your investment portfolio, you can look at the holdings contained within the ETF. This will list all the companies, as well as their proportion inside the fund.

Some ETFs are small and only hold 10 to 20 companies or less, but many are large and will hold over a hundred different stocks. This way, by purchasing a few select ETFs, you get exposure to hundreds of different companies in the stock market, but at a much lower cost to you than if you try to do so yourself. Depending on its holdings, the ETF might pay a dividend just like a stock. This is usually a monthly or quarterly distribution that results from the dividends received from the stocks within the ETF. This is why ETFs are an awesome addition to your stock portfolio if you want to increase your passive income.

Finally, because ETFs are still managed by a fund manager, you don't have to do a lot of the active trading. Typically if you choose your ETFs well, you only have to buy them once and hold onto them for the long-term, and enjoy the capital gains and dividends that they pay out your portfolio. This is way easier than trying to decide what to buy or sell stocks in your investment portfolio. As you can see, ETFs are an awesome way to get into the stock market and to start enjoying the rewards of investing.