Some of the most actively traded equity securities on Wall Street are not blue chip stocks; they are exchange-traded funds, and there are various reasons why investors love them. As their name implies, ETFs are essentially shares of investment funds managed by professional managers who oversee portfolios. ETFs are similar to mutual funds, but instead of net asset values they feature stock prices, and they can be traded just like stocks, which means that they can be openly purchased, sold, and shorted during the Wall Street trading session and even on platforms that handle after hours trading.
With hundreds of ETFs to choose from, and new ones being introduced each year, investors will find many interesting options to match their individual approach to the markets, but this decision has to be made with the same level of care as company stocks. A problem with ETFs is that many investors only look at their names and recent performance; this is an insufficient method of determining the investment securities that should be added to a portfolio. The first consideration should be on the goals of the fund managers and their strategies; for example, the Global Robotics and Automation ETF, which trades on the Nasdaq as ROBO, is dedicated to the growing business of automation and artificial intelligence.
The holdings of ETFs are as important as those of mutual funds. Investors who wish to get exposure in specific industries, sectors, and segments should make sure that all the securities tracked by ETFs are conducive to the kind of investments they are interested in. It is easy to select index ETFs like the SPDR S&P 500 Trust because investors are not likely to object to fund managers investing in the performance of an established Wall Street benchmark, but when it comes down to an instrument such as the Global X U.S. Infrastructure Development ETF, it is important to check the holdings in case some are projects unlikely to ever being completed because of political issues.
Something else to consider is the assets under management of the ETF. Smaller funds will have to pass on expenses to investors while larger funds with plenty of capital will have an easier time doing so because the expenses can be diluted among a greater investor base. In the end, ETF securities are like dynamic mini portfolios, but investors should conduct the normal due diligence and research as they would with stocks.