What is Index ETF?

by Gil on August 5, 2017

Exchange-traded fund is one of the newest investment opportunities that is becoming popular all over the world. It has many features very favorable for individual investors and newbie to investing.

ETF has a valuation characteristics with the combination of stocks and mutual funds. It can be bought or sold during the trading hours of the stock market or can be bought at the end of the day just similar to mutual funds.

It has also different types according to where the asset is invested. ETF can be index, commodity, bond, currency, leveraged and actively-managed.

Index ETF 101

An index ETF is invested in the securities of a stock market index. Its primary goal is to replicate the performance of the stock exchange index. Some index ETFs invest its assets in whole or to selected number of securities in a stock market index.

Most index ETFs invest 100% of their assets on the stocks included in a market index. This type of investing strategy is called replication. If the stock market index is up by 10%, index ETF will normally will be also up by 10% or less but not greater than 10.

Another strategy of investing that can be applied to index ETF is investing majority of the asset in the securities of the market index and the other remaining percentage in other securities, options or futures.

As of November 2010, SPDR S&P 500 is the largest index ETF in the world in terms of assets and it is invested in the securities of S&P 500 .

What are the advantages of index ETF?

One advantage of index ETF is that it is a diversified investment holding various securities in a stock market index. Once you buy it, you are buying many stocks in a single transaction saving you some transaction fees and taxes.

If you don’t want to track and monitor personally each individual stock that you want, a good alternative is to buy an index ETF since it is composed of many stocks in one fund.

Index ETF is one good alternative when you want a diversification of your portfolio. It has several benefits that new investors should consider to invest in.

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