What is an ETF?
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.
For more information, see my previous article on ETFs: Exchange-Traded Funds (ETFs).
Why Invest in Index ETFs?
An Index ETF is an ETF that tracks a specific stock market index, such as the NASDAQ 100, S&P 500, or Dow Jones Industrial Average. This means when you buy an index ETF, you gain exposure to all the stocks that comprise the index. For example, if you bought QQQ, the NASDAQ 100 index ETF, you would gain exposure to Google (GOOG), Apple (AAPL), Tesla (TSLA), CostCo (COST), and all the other stocks currently part of the NASDAQ 100 index.
The indexes are composed of a diverse set of stocks, so you automatically have exposure to various industries. If the index goes up, your index ETF will also go up. When a company in the index pays a dividend, your ETF will also pay a dividend.
Advantages to buying Index ETFs
There are a number of advantages and benefits to buying index ETFs. First, you are diversifying your holdings because the ETF is a basket of other stocks. You are also diversifying your risk exposure. A sharp decline of a single stock will not translate in to a sharp decline of the ETF because the other components in the ETF will decrease the loss and risk. If a stock in the ETF pays a dividend, you will receive a share of the dividend through the ETF. If the index the ETF tracks increases in value, your ETF will also increase in value.
Here is a break down the benefits of ETFs:
- Diversification of stocks
- Diversification of industries
- Reduced risk
- Dividend income
- Top companies in the market
- Tax efficient
- Low expense ratios
List of U.S. Index ETFs
Here is a complete list of U.S. stock market index ETFs: