Key takeaways

• An ETF is an exchange-traded fund that can be traded on an exchange like a stock.

• ETFs are a way to pool money and make investments in stocks, bonds, gold, etc.

• Most ETFs are index trackers and their prices fluctuate throughout the day.

Understanding an ETF

"In my view, for most people, the best thing to do is to own the S&P 500 index fund", Warren Buffett said at a Berkshire Hathaway's annual meeting.

Selecting a good company to invest in is a complex and time-consuming task, especially for novice investors. In most cases, buying an index-based ETF, a predominant type of ETFs, is regarded as a good strategy for general investors.

An exchange-traded fund (ETF) is a fund that invests in a basket of securities. Similar to mutual funds, ETFs are a common way to pool money in a fund. 

ETFs become growing popular because of two attributes. They not only are alternatives to diversified investment portfolios but can be traded on exchanges like a stock at market prices. The share price of an ETF fluctuates all way in rhythm with the index or securities tracked. 

ETFs have different types but the majority are index-based ETFs. With the prosperity of ETFs, actively managed ETFs have sprung up. For example, Cathie Wood's Ark Invest ETFs-ARK Innovation ETF ($ARK Innovation ETF(ARKK.US)$), was one of the hottest actively managed ETFs in 2020.

However, like any financial product, ETFs aren't a one-size-fits-all strategy for successful investing. While you are choosing an ETF, its investment objectives, strategies and fees, historical performances should be taken into consideration.

Example

If you don't have enough time to invest, but you want to trade as a side hustle. Just like what Buffett said, you believe an index fund is a good way to invest in the U.S. stock market.

For example, the well-known SPY is an ETF that tracks the S&P 500, which consists of the 500 largest U.S. companies. $S&P 500 index(.SPX.US)$ was up 16.26% in 2020 and SPY even gained 16.58% during the same period.

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