Exchange Traded Funds or ETFs Index in sum are investment baskets that include a group of securities and follow a specific index with a specific idea and trade in the financial market (stock exchange).
Why ETFs?
Today, in the financial markets, investors have thousands of options, whether they're stocks, bonds, real estate or other investment assets. In the US market, for example, there are more than 6,000 listed companies as well as the rest of the international companies, also other types of assets. So the question here is how does the investor choose between them? How does the investor track its performance? The solution is simply by ETFs.
How does an index fund work?
If you put your money in an index fund, it distributes it to all components of the index it tracks, and updates them according to that index continuously. For example, if you put your money in the SPDR S&P 500 Trust ETF, which is the most famous ETF and it tracks the well-known S&P 500 index, which includes the largest 500 companies in the US market, therefore, you've invested in all of these companies all at once, and your investment will be redistributed continuously without any interference from you.
Investing made easy, one fund includes 4,000 companies
If you want to invest in the US stock market companies, but you don't track the market and don't know how to choose good companies or promising sectors, you can simply do so by entering only one fund that includes all companies, the most popular ETFs for the entire stock market are the Vanguard Total Stock Market Index Fund ETF and the iShares Core S&P Total US Stock Market ETF. By entering one of the two funds, you can easily invest in all the companies in it.
One fund is enough for each type of asset?
What is the asset allocation in your portfolio? Let's say you want to put 60% in stocks and 40% in bonds. You can also do that easily by choosing one fund for each type of asset, for stocks, for example, one of the last two funds, and for bonds from the well-known iShares Core U.S. funds. Aggregate Bond ETF and Vanguard Total Bond Market ETF.
What if you want to invest in a specific sector / specific country?
You may be an investor who tracks market news and is interested in focusing your investment in companies in a specific sector, let's say companies in the IT technology sector. You can also simply enter into one fund that tracks the technical sector index such as the Vanguard Information Technology Index Fund ETF and you will be an investor in all technology companies such as Apple, Microsoft and others with a total of 360 companies. But if you want to focus your investment in a specific country, you can also, for example, the iShares MSCI Saudi Arabia ETF, which invests in 87 companies in Saudi only, such as Aramco and Al Rajhi Bank.
Finally, index funds or individual choice?
Certainly the individual choice has its own benefits, however investing through index funds may provide you with 3 advantages that make it easier for you to manage your portfolio: ease of choosing the portfolio's components, eliminating the risk of fluctuations in a single security, saving time and effort tracking the continuous market and relying on indicators instead.
Regulated by the DFSA
Past performance is no guarantee of future results. Your investment can fluctuate, so you may get back less than you invested. Consider each product’s risk(s) before investing. Baraka is not a financial adviser and therefore does not provide financial advice. Our content is informational only.
