People often search for ways to grow their money and build a secure financial future. That said, many opt for simpler, more natural strategies intended to lessen their risk and make the process easier for them to understand.
Fortunately, exchange-traded funds, often abbreviated as ETFs, provide viable investment options for those yearning to invest in various markets. ETFs come with many advantages, including exposure to different stocks across various industries, low expense ratios and commissions, and risk management with diversification. While ETFs do have their advantages, they may not be the best choice for every investor.
A Crash Course on ETFs
Financial industry professionals define exchange-traded funds as investments capable of tracking numerous assets capable of being either purchased or sold on an exchange, similar to stocks. These investment opportunities have gained in popularity because of their capacity to afford investors access to a wide array of markets and avenues to put their money.
Moreover, said holdings are relatively cheap to invest in compared with other assets. Occasionally, ETFs can be obtained commission-free and are considered less costly than investments like mutual funds.
Additionally, they enable owners to diversify their portfolios, which may decrease their risk of sustaining losses during financial instability or economic downturns. Two of the more popular ETFs invested in these days include the QQQ and SPY varieties.
The Tale of the Tape
The QQQ ETF invests in entities currently listed on the NASDAQ-100 stock exchange. This grouping of corporations represents the leading 100 non-financial companies that the exchange follows. Primarily, establishments listed on this exchange are tech companies. Therefore, those interested in the tech sector may be well served by investing in the QQQ ETF.
Some industry professionals consider the QQQ ETF, which officially began on March 10, 1999, an indicator of how well the tech industry is performing in the world of investments because of its involvement with technology companies and tech stocks.
The share price from which the QQQ ETF is traded follows the modified capitalization methodology principle. This method uses the individual weights of a company's market capitalization. The process, also called weighting, attempts to lessen the power wielded by the most impactful and influential companies.
Said effort is initiated to render the trading process as fair and balanced as possible for all entities on the exchange. NASDAQ officials complete this vital task by reviewing the composition of its index following each fiscal quarter and adjusting the weightings should distribution requirements not be met.
Investors should also understand that "technology" carries a broad meaning. The QQQ ETF tracks companies in tech industry subsectors such as information technology (IT), communications services, and even certain facets of healthcare.
On the other hand, the SPY ETF tracks entities appearing on the Standard and Poors (S & P) 500 exchange, a collection of the largest publicly traded companies in the United States. This ETF is considered one of the most popular and actively traded exchange-traded funds.
The companies listed on the S & P 500 receive this distinction based on several key factors, including their market size, liquidity, and industry.
Many economic insiders consider establishments listed on this exchange a primary indicator of the nation's equity market. Furthermore, the market's performance is widely considered a barometer of the overall state and stability of the American economy.
The SPY ETF began on January 22, 1993. As of September 25, 2024, its total assets equal more than $573 billion. The ETF is categorized as a unit investment trust (UIT), meaning that it forms units that can be developed and cashed in by entities issuing said assets. This outline enables the SPY ETF to follow the lead established by the S & P exchange and hold each of its members to their target weights.
S & P holds greatly diversified assets because its exchange contains various members operating in different sectors. Its top five industries include IT, financial investment companies, healthcare establishments, consumer discretionary businesses, and communications services.
Moreover, the fund invests most of its money in common stocks of well-known companies such as Amazon, Berkshire Hathaway, Apple, NVIDIA, and Microsoft. Therefore, this ETF might benefit individuals seeking to foray into the stock market without purchasing large and potentially pricey stocks.
Key Issues to Consider
Even seemingly less risky investments like ETFs always involve some risk. Unexpected events such as industry trends, market volatility, and the economy's general performance could significantly influence an ETF's performance, and both QQQ and SPY are no exceptions.
When the tech industry experiences a boom, QQQ holdings may perform quite well. However, an investor's profits may not be so high if tech ever hits a downturn. Some argue that SPY is a safer option because of its diversification into a greater arena of companies and industries.
Building a Useful and Lasting Portfolio
The commonly used expression "don't place your eggs in one basket" certainly applies to the investment world. Therefore, prospective investors are encouraged to construct portfolios using both types of ETFs. One's assets can be invested in growth-oriented and more broad market initiatives, provided the investor formulates a plan and responsibly allocates their money.
Before making any concrete investments, certain notable factors should be considered, including:
Establishing Investment Goals
One truly cannot invest wisely until one determines one's investment goals. One should ask questions such as why one is investing, how long one wishes to invest, and what the funds are intended for. Answering these questions makes the process simpler to navigate.
Avoiding Unnecessary Risk
Before investing, investors must determine what they can risk. What one can and may be willing to risk is different. Investors should only invest what they can afford to lose at a given time.
The Big Picture
ETFs such as QQQ and SPY enable investors to invest in companies traded on major markets like NASDAQ and S & P. These opportunities provide positive benefits such as reduced investment costs and the chance to diversify funds in a wide range of companies and industries. Individuals considering entering the investment arena are strongly encouraged to consider ETFs.
