Beginner’s guide to exchange traded funds (ETFs) for 2025

In the world of investing, Exchange Traded Funds (ETFs) have become a popular choice among both novice and experienced investors alike. As we head into 2025, understanding how ETFs work and how they can benefit your portfolio is crucial. This beginner's guide will help you navigate the basics of Exchange Traded Funds, explore their advantages, and show you how to start investing in them.

What is an Exchange Traded Fund (ETF)?

An Exchange Traded Fund, or ETF, is a type of investment fund that is traded on stock exchanges, much like individual stocks. It holds a collection of assets, such as stocks, bonds, or commodities, and allows investors to buy shares of the fund. ETFs provide a way for investors to diversify their portfolios without having to pick individual stocks or bonds.

ETFs are designed to track the performance of a specific index, sector, or asset class. For example, an ETF might track the S&P 500 index, giving investors exposure to 500 of the largest companies in the United States. The value of an ETF changes throughout the trading day, just like a stock, and it can be bought or sold at any time during market hours.

Advantages of ETFs for Beginners

One of the key reasons ETFs have gained popularity is their low cost. Compared to mutual funds, ETFs typically have lower expense ratios. This makes them an attractive option for beginner investors who want to minimise fees and keep their investments simple.

Another advantage of ETFs is their diversification. When you invest in an ETF, you are automatically gaining exposure to a variety of assets. This reduces the risk associated with investing in individual stocks, as the performance of one stock won’t heavily impact the overall value of the ETF.

Furthermore, ETFs are highly liquid. Since they are traded on stock exchanges, you can buy and sell them at any time during the market hours, unlike mutual funds, which are only traded once a day. This flexibility allows investors to take advantage of market opportunities more easily.

How Do ETFs Work?

ETFs function by pooling investor capital and investing it in a portfolio of underlying assets. These assets can be stocks, bonds, commodities, or real estate, depending on the type of ETF. The value of the ETF is determined by the combined value of the assets it holds.

Unlike mutual funds, which are actively managed, most ETFs are passively managed. This means they aim to track the performance of an index rather than trying to outperform it. However, there are also actively managed ETFs, where a portfolio manager makes decisions on the fund’s investments.

Each ETF has a specific goal or strategy, which is outlined in the fund’s prospectus. Some ETFs focus on broad market indices, while others target specific sectors, such as technology, healthcare, or energy. There are also thematic ETFs that focus on trends such as artificial intelligence, green energy, or sustainable investing.

Types of ETFs

Equity ETFs: These ETFs invest in stocks and are designed to track a specific index, like the S&P 500 or the Nasdaq-100. They provide exposure to the stock market and are popular among investors seeking long-term growth.
Bond ETFs: Bond ETFs invest in fixed-income securities, such as government or corporate bonds. These ETFs provide a more conservative investment option for those looking for income and stability.
Commodity ETFs: These ETFs invest in physical commodities like gold, silver, or oil. They allow investors to gain exposure to commodity markets without the need to physically buy the commodity.
Sector and Industry ETFs: These ETFs focus on specific sectors or industries, such as technology, healthcare, or financials. They provide targeted exposure to industries that are expected to perform well.
International ETFs: International ETFs invest in stocks or bonds from foreign countries or regions. They provide a way to diversify your portfolio by gaining exposure to international markets.

How to Invest in ETFs

Investing in ETFs is simple and can be done through a brokerage account. To start, you'll need to open an account with a brokerage firm that offers access to ETFs. Most brokerage platforms allow you to trade ETFs just like individual stocks.

Once your account is set up, you can search for ETFs by ticker symbol, sector, or asset class. It’s important to research the ETF’s holdings, performance, and expense ratio before making an investment.

When buying an ETF, you can either purchase it at the market price or place a limit order, which specifies the price at which you are willing to buy. ETFs are bought and sold in shares, so you can invest as little or as much as you want, depending on the price of the ETF.

Understanding Earnings Per Share (EPS) and its Relevance to ETFs

Earnings Per Share (EPS) is a critical financial metric that helps investors evaluate a company’s profitability. It is calculated by dividing a company’s net income by the number of outstanding shares. For ETFs that track stock indices or individual stocks, EPS is an important factor to consider.

ETFs that focus on specific companies will have exposure to those companies’ earnings. Understanding EPS can give you insight into the financial health of the companies within the ETF. Higher EPS values generally indicate that a company is profitable and efficient at generating income for its shareholders. When investing in equity ETFs, looking at the EPS of the underlying companies can help assess the potential growth and performance of the ETF.

Risk Factors to Consider with ETFs

While ETFs offer diversification and low costs, they are not without risks. The value of an ETF can fluctuate based on the performance of the underlying assets. For example, if you invest in an ETF that tracks the stock market, the value of your investment will rise and fall with the stock market.

Additionally, sector-specific ETFs can be more volatile because they are concentrated in a particular industry. For instance, if you invest in a technology ETF, the value of your investment will depend on the performance of the tech industry, which can be affected by various factors such as government regulations or technological advancements.

Another risk to consider is liquidity. While ETFs are generally liquid, some niche or specialized ETFs may not be as easy to trade. Always ensure that the ETF you are investing in has sufficient trading volume to avoid liquidity issues.

Conclusion

In conclusion, Exchange Traded Funds (ETFs) are an excellent investment option for beginners in 2025. They offer low costs, diversification, and flexibility, making them an ideal choice for those looking to start their investment journey. By understanding the various types of ETFs and how they work, you can select the right funds to suit your investment goals. Additionally, by considering factors such as Earnings Per Share (EPS), you can make more informed decisions about the ETFs you invest in. As with any investment, it’s essential to assess your risk tolerance and conduct thorough research before diving in.

To sum up, Exchange Traded Funds (ETFs) provide an accessible and cost-effective way for beginners to build a diversified investment portfolio. By understanding the key factors involved, including Earnings Per Share (EPS), investors can make informed decisions and navigate the world of ETFs successfully.

Also Read: Understanding debt funds: A beginner's guide to safer mutual fund investments