Have you ever thought about investing but felt overwhelmed? You're not alone. The world of investment can seem complicated, but it doesn't have to be. Today, many people are turning to a popular and easy-to-understand investment option called an Exchange Traded Fund, or ETF. Think of an ETF as a smart way to invest in many different things at once. It combines the ease of buying a single stock with the safety of spreading your money across many investments.

Here, we will walk you through what ETFs are, why they're so popular and how they can help you start your investment journey.

Your diversified investment basket

Imagine you want to buy a variety of fruits, but instead of buying each one separately, you buy a pre-made fruit basket. That's a bit like an ETF.

An ETF is simply a basket of different investments like stocks, bonds, or even commodities such as gold. When you buy one share of an ETF, you're buying a small piece of everything in that basket. Here’s the key difference: ETFs are traded on a stock exchange, just like individual company shares. This means you can buy and sell them throughout the day, whenever the market is open. This makes them very flexible and easy to manage.

Understanding different ETF types

Because ETFs are so versatile, you can find a fund tailored to almost any investment goal.

Understanding different ETF types:

• Stock ETFs: These hold stocks from many different companies. You can find ETFs that focus on large companies, specific industries (like technology or healthcare), or even companies from different countries.
• Bond ETFs: These hold bonds, which are like loans to governments or companies. They can be a good choice if you're looking for less risk than stocks.
• Commodity ETFs: These let you invest in raw materials like gold, silver, or oil, without having to own them physically.

Why smart investors choose exchange traded funds

The growing popularity of ETFs is not just a trend. It is driven by practical advantages that appeal to a wide range of investors. These powerful features make ETFs a valuable addition to many portfolios, and here's why:

• Easy access to markets: Want to invest in a specific country or industry? An ETF can get you there instantly, often with just one purchase.
• Built-in diversification: Instead of putting all your money into one company, an ETF automatically spreads it across many. This helps reduce risk because if one company struggles, others in the basket can help balance it out.
• Clear and transparent: You can usually see what assets an ETF holds every day, making it easy to understand where your money is invested.
• Flexibility: Since you can trade them all day, you have more control over when you buy and sell.
• Lower costs: Generally, ETFs come with lower management fees, which means more of your money stays invested and works for you.

Navigating the landscape: exploring potential ETF risks

While Exchange Traded Funds have their advantages, it is important to remember that no investment is without risk. Understanding these potential considerations is key to making informed decisions, and here are a few to keep in mind:

• Market risk: If the overall market or the assets within your ETF's basket go down, the value of your ETF will also go down.
• Small differences: While ETFs aim to perfectly match their underlying index, sometimes there can be tiny differences in performance due to fees or how they're managed. This is called tracking error.
• Specific risks: If an ETF focuses on a very narrow area (like one country or a single industry), it might be more sensitive to events affecting that specific area.

Inside the ETF framework

To fully appreciate how ETFs empower investors, it helps to explore the fundamental processes that define their structure and performance:

• Physical ETFs: Most ETFs, like those from Lunate, directly own the stocks or bonds that make up their basket, providing direct exposure to those underlying assets.
• Liquidity: This just means how easily you can buy or sell an ETF without affecting its price too much. Because ETFs trade on exchanges and have a special system for creating and redeeming shares, they tend to be very liquid.
• Pricing: Besides the market price you see throughout the day, every ETF has a net asset value (NAV), which is its true value calculated at the end of each day. During the day, you'll often see an indicative net asset value (iNAV), which is like a real-time estimate of its value.
• Costs: When you buy an ETF, you might pay a small brokerage fee (like a commission) to your broker. There's also a tiny difference between the buy and sell price (called the bid/ask spread). And, as mentioned, there's a yearly expense called Total Expense Ratio (TER) that covers the ETF's management costs.

The journey into financial markets can seem daunting, but with the foundational understanding of ETFs now in hand, you are well-equipped to navigate its complexities. Embrace the clarity, flexibility and potential for diversification that ETFs offer, and confidently take the next step towards realising your financial aspirations.