Hi everyone - this is matt from mad strats and in this video i'll, be covering a general overview of exchange, traded funds, better known as etfs. In the last 25 years, etfs have become one of the most popular investment vehicles for both institutional and individual investors. The reason for their popularity will become apparent, as i cover what this asset class is all about. An etf is defined as an asset that represents a collection of securities.

In this case, a security is a negotiable financial instrument that holds some type of monetary value. That is a nice fancy definition to know, but what does it actually mean? I personally like to think of an etf as a basket of stocks. This basket is traded on an exchange, hence the name exchange traded fun since it is openly traded on the market. The share price of an etf fluctuates throughout the day as it is bought and sold similar to a stock.

This means you can consider an etf to be a stock which is made up by a group of other stocks. As a quick example, one of the most well-known etfs is the spyder s, p, 500 or spy which tracks the s p 500 index. What can go into an etf? The answer is many things. Etfs can contain all types of investments, including stocks, commodities or bonds.

Some offer us-only holdings, while others include international holdings. There are a handful of variations on etfs, two of which i'll describe now, leveraged and inverse, while a traditional etf, typically tracks a basket of securities on a one-to-one basis, a leveraged etf main for a two to one or even three, to one ratio. These etfs should be traded with caution, because leverage is a double-edged sword, meaning it can lead to significant gains or significant losses. Since the overall return is magnified, an inverse etf is constructed by using various financial instruments which profit from a decline in the value of the basket being tracked, these etfs move in the opposite direction of the assets.

It follows in general, etfs have low management fees since they are passively managed, typically leveraged and inverse. Etfs have higher management fees relative to traditional ones. There are numerous advantages to etfs, especially when compared to mutual funds, a subject i'll cover in another video, the main benefit to owning an etf is diversification. One etf can give exposure to a group of equities and help mitigate market risk.

Etfs do come with their own set of disadvantages as well. Most people compare trading etfs with trading other funds, but if you compare etfs to investing in a specific stock, then the costs are higher. The actual commission paid to the broker may be the same, but there is no management fee for an individual stock to fully understand etfs and their associated pros and cons. I would suggest consulting a financial advisor if you have any questions or comments leave them below.

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