As retail investors, we are often taught to put our money into a 401K and pick conservative, moderate, or aggressive growth and let time do the rest. However, there are many different products at your disposal and you should know what they are to better construct your personal portfolio. The current popular ones are ETF’s, mutual funds, and options. Certainly these investments are not for everyone, but it is important to know what they are and what they offer incase the situation arises where you may need these. Investing is a never-ending process of learning and adjusting as the market is always evolving.
First off, a popular product you probably hear about is an ETF or exchange traded fund. This works similar to a stock in that it can be traded on the open market and works similar to a mutual fund in that there are underlying securities that build the ETF. A primary reason ETF’s where made was to give the retail investor exposure to markets they normally would not have access too. Examples include commodities, futures, and currency exposure. The most well known ETF is the SPY, which is an ETF that tracks the S&P 500, which can give your portfolio exposure to the overall market movements.
A very popular product that works similar to an ETF is a mutual fund. A mutual fund is a fund that aims to track a certain benchmark. How a mutual fund is created is there are securities that make up the fund that allow it to track a certain way, giving investors their desired exposure. How they differ from an ETF is that when sold, a fund may have to eliminate some positions to pay you, or if it’s a closed fund, you’ll have to find a willing buyer, as there is a limited amount of space. Also, the expense ratio is a data point that you can compare, as a fund may be less expensive compared to an ETF. This is another product that can give you exposure you otherwise may not have been able to have.
This product can potentially add to your returns in a substantial way, but there is greater risk. An option is the right, but not the obligation, to purchase the underlying security at a specific price at a later date. An option gives you the right to purchase 100 shares if you decide to exercise the contract. Options can give you great leverage because pricing may be cheaper than buying the stock out right while giving you the desired exposure. There are many different techniques on how to trade them, but this product can certainly add value if used correctly.
Overall, these are the three products that are talked about most in the news, yet many are unsure what they are. If one interests you, do your own research and see if this would be a good fit for you portfolio. Not all of these products are perfect fits, but it certainly pays to know what they are and how they operate.