Built-In Diversity of an Exchange Traded Fund

An exchange traded fund is one of the most popular ways to invest in the current investment world. An exchange traded fund is like a mutual fund that you can trade on the stock exchange. Its flexibility is what draws a lot of investors to it. You can do so many things with it and get involved with so many different kinds of investments. It is one of the most diversified investment vehicles in the world. Here are some things to consider about the built-in diversity of an exchange traded fund. 

What You Are Buying

When you buy a share of an ETF, it is important to understand exactly what you are getting. Each ETF invests in a certain amount of other securities. For example, when you buy an ETF, it will usually have thousands of shares of several stocks. It may have treasury bonds, commodities, and other things all mixed into one. With the vast amount of stocks that make up the ETF, it provides you with a nice level of diversification. If one stock in the portfolio goes bad, you still have several other stocks to pick up the slack. This diversified nature of investing can limit your returns to slow, steady gains. However, at the same time, it provides you with a way to protect your money as well. 

Types of ETFs

To understand how ETFs are diversified it helps to know exactly what kinds of ETFs are out there. With ETFs, you can invest in entire sectors or industries. You can invest in sub-sectors of the industries as well if you want. You can invest in commodities and companies that deal with commodities. 

For example, you could invest in a retail ETF and be a player in the entire retail industry. You are not buying shares of a stock of a particular retailer. Buying stocks in a particular retailer carries with it a lot of risk. One company could go under. However, if you buy a share in a retail ETF, your money is greatly diversified. You are betting on the retail industry as a whole instead of focusing on only company within the retail industry. This gives you much better odds of a good return as the probability of the entire retail industry going under is not very likely. 

You can also invest in commodities with a much lesser risk than other methods. Previously, about the only way that you could prospect on commodities was to take out a confusing futures contract. They were very risky and only available for certain investors. With an ETF, you can invest in commodities without all the confusion. For example, an oil ETF might invest in several different oil companies in the industry. This gives you the ability to prospect on the price of oil without directly being tied to it. 

This level of diversification is similar to a mutual fund. However, the big advantage that ETFs have over mutual funds is that you can trade them at any time when the exchange is open. This allows you greater flexibility on your investments. 

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