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Exchange traded funds give investors an opportunity to invest in a fund of shares that can be bought and sold on the stock exchange in the same way as other shares. This enables the investor to have access to a diversified fund of shares in one investment that can then be sold for cash at any time. This gives the investor flexibility to change the balance of a portfolio easily and to adapt the investments held to allow for changes in the economic situation or changes in the needs of that particular investor.
Exchange traded funds have increased in their scope in recent years. They now cover a wide range of different asset classes and geographical areas. The investor may obtain an exchange traded fund that tracks a particular stock market index, asset class, commodity, country or region. This can be the ideal way to move the investment portfolio into a new asset class with reduced risk owing to the diversification provided by the range of underlying assets in the fund.
Funds can cover an asset class such as shares, bonds or property. They can be based on shares in a particular industrial sector or an area such as Europe or North America. They can be used to acquire an interest in emerging market shares or to move into property shares. Some cover investment in a particular commodity such as copper or a basket of commodities such as precious metals. By offering an investment based on a diversified set of underlying assets they may protect the investor against fluctuations in the value of individual stocks or commodities.
Anyone who is thinking about investing in exchange traded funds must give careful thought to the aims behind their personal investment strategy. The strategy of a person aged below thirty years old will tend to be different to that of a person aged over fifty, for example. Some investors are looking for growth over time while others may be looking for quicker gains in the short term. Some are building a fund for their pension while others are building up funds for other life goals such as the acquisition of a property, repayment of a mortgage or support for a future business venture.
A person acquiring participation in exchange traded funds should consider the future prospects of the asset class or the region in which each fund invests. This should not be based on the historic performance of that asset class or region in recent years but on a reasoned assessment of the likely future performance based on the current economic conditions. For example the investor could study the current and future demand for a particular commodity, the supply of that commodity on the world market and the effect of speculation on the current market price. In the case of a fund of shares in a particular sector, the prospects for that sector and the movement in economic conditions should be carefully studied.
If a person is acquiring an interest in exchange traded funds the method by which each fund invests should be studied. For example, a fund that invests in a particular country would be invested in certain stocks that may be representative of the various industrial and other economic sectors in the country. Investors may wish to look carefully at the acquisition strategy of a fund that tracks a particular stock index. Some funds may not acquire shares in all the companies represented in a particular index but may acquire a representative selection. Over time, this will need to be adjusted to ensure that is still accurately tracks developments in the index. An investor should look at the strategy used by the fund and see if this is adequate for the aims of that investor.
Another consideration is the expenses incurred by the exchange traded fund in managing its investments. One fund may increase in value at a greater rate than another if it can control its management and administrative costs and pass on gains on the underlying assets to the investors. The level of expenses of the fund expressed as a ratio, referred to as the total expense ratio, may vary from one fund to another. In choosing between funds this is a consideration that should not be overlooked by the potential investor.
Exchange traded funds offer a convenient way for ordinary investors to acquire a diversified portfolio of investments that can be quickly adapted to changing personal or economic circumstances. A participation in a fund can be used to widen the scope of an investment portfolio. Any investment should be undertaken only after careful consideration and taking advice where appropriate.
