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ETFs: What are they? A short explanation.

ETFs, one of the most misunderstood terms in the world of finance. What are they? While they may be misunderstood, they are perhaps one of the greatest vehicles in order to achieve a passive stream of income. How do they work? ETFs, or Exchange Traded Funds, are essentially index linked and industry linked funds which trade like common stocks. Think of them as a lesser version of the Dow Jones Industrial Average or the S & P 500. There are various types of ETFs, which we will discuss in this article. How much can they make? While the maximum profit potential is not equated accurately when talking about the various separate funds, we can pinpoint an average of which will do better and what you would have to give up.

First type of ETF I’d like to discuss is one known as a Blue Chip ETF. These ETFs feature various differing blue chip companies, which offer great returns and promising results, as most of the companies within the fund will have a solid track record and are quite reputable to say the least. One of which that is worth noting is $SPY. SPY tracks the S & P 500 index fund, and features companies like Apple, Microsoft, and Amazon just to name a few. $SPY has posted a 16.46% return YTD. These ETFs are some that offer excellent economic performances, and also pay out dividends in cash.

The next type of fund that will be discussed is a growth fund. Growth funds offer the possibility for much higher gains than Blue Chips, yet not guaranteed at the same degree as Blue Chips, yet do NOT pay out dividends. Some companies in these funds would be companies which have not yet reached the specific requirements needed, fiscally, in order to pay out dividends. $VUG is a growth ETF assembled by Vanguard, which offers a YTD return of about 15%.

One of the more pertinent and well utilized funds are sector funds. They are extremely similar to mutual funds, as are all ETFs but these are structured quite similarly, while offering essentially a fund which is tied completely to the sector. Sector funds would be more of a passively managed fund, as there is not much need to focus on said funds on a daily basis. The sector funds will track things like the S&P 500, $SPDR.


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