How Does the ETF Market Compare to Alternative Investments?

The ETF market is a very diverse financial market that involves many different industries and is a relatively new investment tool, compared to many other models. There are still many people learning the benefits of trading an ETF. Currently, you can choose from over 800 options if you want to invest in an ETF. This gives you many choices that cover a wide array of industries and companies. Compared to other forms of investments, ETFs can provide you with many benefits. Here are a few ways that the ETF market compares to other alternative investments.

Compared to Stocks

Stocks are still the most commonly known investment vehicle in the world today. Stocks are bought and sold on many exchanges across the world. When you buy a stock, you are basically betting on the success or failure of a particular company. Therefore, your success is then tied to the company's performance. 

When you buy an ETF, you are actually buying a share of a whole basket of stocks and other securities. Your share entitles you to a portion of each share that is hold by the fund. 

For comparison purposes, let's say that you buy a share of a stock of Wal-Mart. All of your investment money is then tied up in Wal-Mart stock. If the company does well and continues growing, you can make a lot of money. If the company profits dwindle, you will lose your investment. 

On the other hand, let's say that you wanted to buy an ETF. You could buy a share of a retail ETF that actually owns stocks in Wal-Mart, Target, Kohl's and other retailers. Then your success or failure is based on the industry as a whole, instead of that one company. 

As far as actually trading, both of them are about the same. You can buy or sell them on a stock exchange whenever the market is open. They have high volume and are easy to buy and sell whenever you want. The potential with a stock is greater, but the risk is greater as well. 

Compared to Mutual Funds

Another popular type of investment is the mutual fund. The mutual fund is very similar to the ETF because they both hold an underlying basket of stocks or other securities that make up the fund. You are buying a portion of each share when you buy a share of the mutual fund. The performance of ETFs and mutual funds are usually very similar. 

The main difference between an ETF and a mutual fund is the way that they are bought and sold. When you want to buy a mutual fund, you put your order in and at the end of the day, you buy it for the net asset value. With the ETF, you can get on the exchange at any point that it is open and buy or sell what you want. 

Also, mutual funds and ETFs are taxed differently. Instead of being taxed with profits like mutual funds, ETFs are taxed only when sold.

blog comments powered by Disqus
Scottrade