It’s time for another investment post in the My First Portfolio series.  I hope you have enjoyed reading about Mutual Funds, Stocks , and Dividends.  Today we are going to discuss another type of investment option that is available for our investment portfolios.

Exchange Traded Funds are also known as ETFs.  ETFs are not as commonly known to individual investors as Mutual Funds or Stocks. However, they are still a good investment option for our investment portfolios, especially when dividend growth is not where we want it to be.

What is an ETF?

Exchange Traded Funds are investment options that are traded on stock exchanges such as NASDAQ or the S&P 500.  ETFs share some similar qualities to both Stocks and Mutual Funds. Exchange Traded Funds trade on a daily basis which is similar to a Stock, and they usually follow an index such as a Mutual Fund.

ETFs can hold different assets such as Stocks, Commodities, and Bonds, which is similar to a Mutual Fund.  However, they can be traded throughout the business day until the market closes, which is similar to a Stock.

Some investment professionals say that an ETF is the perfect balance between a Stock and a Mutual Fund. ETFs allow us to take advantage of the benefits of a Mutual Fund with the added flexibility of a Stock.

According to Investopedia the definition of an ETF is “A security that tracks an index, a commodity or a basket of assets like an index (mutual) fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.”

The various daily price changes of ETFs are a similar quality to Stocks. This is not the same case with Mutual Funds. Mutual Funds can be bought and sold only one time of the day at the current daily market value after the market has closed.

Why do I need to have ETFs in my investment portfolio?

ETFs can be a great investment because they have low management fees and they are tax efficient.  There are many different types of ETFs such as Index ETFs, Commodity ETFs, Bond ETFs and Currency ETFs.

Exchange Traded Funds are mostly used to hedge (minimize or offset) our risk against other investments.  The Globe and Mail recently published an article titled Look to ETFs to hedge against rising rates.  The article discusses the investment strategy of investing in ETFs that directly follow an index which is opposite of an individual bond investment.  This means that as interest rates rise and bond rates fall, our ETF will balance out our potential losses. The ETFs performance will be the exact opposite of our bond investments performance.