3 Things to Know Before You Buy an ETF

When you are thinking about whether or not you should buy ETF shares, there are a number of things that you need to consider. An ETF is a unique way to invest in the market and it presents you with a lot of advantages. ETFs have been around since 1993 and they have grown rapidly in popularity since that point. Now there are well over 700 ETFs to choose from with over $600 billion invested in them. If you are seriously considering putting your money into one, there are a few things that you need to know about ETFs first. Here are a few things that you should be aware of about ETFs.

1. Ways to Purchase

ETFs are often compared to mutual funds in the way that they are managed since they are basically a portfolio of stocks. However, the way that they are purchased is very different. ETFs are traded on an exchange just like stocks. Mutual funds are purchased from a financial institution like an investment advisor or a bank. You do not necessarily have to have a broker account to purchase one. You can also only purchase a mutual fund share at the end of the trading day for whatever its value is. With an ETF, it will basically be like you are buying stocks, only you are buying shares in an ETF. This gives you added flexibility in your investments and more options to purchase. 

2. Dividend Distribution

When you own shares in an ETF, you will be paid dividends at the end of the quarter when they are distributed. Owners of ETF shares are also part owners of shares of stock. Therefore, when these companies pay out dividends, you will be included as part of the group that receives a dividend payment. 

A mutual fund, by comparison reinvests the dividends back into the portfolio of the fund. They use the money to buy more stocks or bonds or whatever they deem to be a good investment. Therefore, you have to decide whether you would rather have the dividends automatically reinvested as they are paid or if you want to receive a dividend. 

3. Investment Options

With ETFs, you are given several options to invest in. With the help of an ETF, you are able to invest in entire industries or sectors. Previously, the only way to do this was with the use of a futures contract. For example, if you wanted to get involved in the speculation of gold, you had to take out a futures contract on it. While this was possible, many investors were scared away by the complexity of the process. 

ETFs are now available in almost every industry and sector that you could imagine. You could buy an ETF that has to do with gold, oil, healthcare or any other asset. You can even buy ETFs that have to do with sub-sectors such as cardio-devices within the healthcare niche. This type of customized investment option is great for many investors that want options. 

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