An ETF, which stands for Exchange Traded Fund, is an investment fund that controls large amounts of investments in a specific field, industry, or commodity. Though an ETF is industry or commodity specific, it is highly diverse, with respect to companies inside the industry. For example, if you wanted to invest in oil, but not a single company, you could choose to invest in an ETF which owns stocks in numerous oil companies. ETFs have no minimum investment, trade like stocks on the market, and are considerably cheaper to maintain than mutual funds.
How ETFs Pay
While each type of ETF pays differently, the primary method of them paying out is based on dividends. Stock ETFs pay from Dividends, split between all holders of the fund minus the fund managers commission, as well as from increases in the stocks price. Real estate ETFs pay from profit generated from properties owned by the fund. Commodity ETF dividends generally go into buying more of the commodity, follow the market value closely, and as such, they are often traded instead of paying out to investors. Many ETFs are considered bonds and will pay back the initial investment upon maturation.
While some ETFs use in-kind trades instead of sales, as an index ETF, an actively managed ETF may not. If an ETF has capital gains, they must distribute the profits to fund holders, and this can incur taxation costs. Some countries don’t allow in-kind trades, and some ETFs use derivatives, meaning there will be Capital Gains, and thus taxation. Since ETFs are tradeable as stocks, you may try regularly trading them, and the trading costs may eliminate the ETF’s low fee benefit. Furthermore, ETFs are susceptible to market, business, and political risks.
With Nasdaq poised to allow Bitcoin Futures in the coming days, Bitcoin has skyrocketed to over 16.5k USD, its highest ever rate, and it is expected to rise. While no Bitcoin ETF is currently available in the United States, in Sweden, their Bitcoin ETF is larger than close to 80% of American ETFs. When they are launched in America, they are expected to not only gain capital quickly but begin the process of stabilising the Bitcoin value. While this may cause it to crash from its current rates, the lack of volatility will help make Bitcoins and Bitcoin ETF investments more secure in the future.
Exchange Traded Funds may be suitable for those who wish to track an entire market or industry, since they are diversely spread, however, they are not without their risks. Though the yearly payout offered by some ETFs may be ideal for particular investors, it may be averse to others. Many commodity ETFs aren’t secured, meaning that they are not covered by insurance, and you take any losses directly. However, in developing fields, like artificial intelligence, or Bitcoin, ETFs can offer a low risk, high return, investment for savvy investors, while also helping the market stabilise. Like any investment, investors should weigh the pro’s and cons, before committing, and never make a hasty decision.