Exchange traded funds (ETFs) are financial instruments that track an index, commodity, sector or a basket of stocks or bonds and are traded like stocks. One of the most attractive aspects of ETFs is that they can provide traders with diversification with a smaller upfront investment compared to trading individual stocks.
Even with large investments they can be more easily managed and traded than tracking all the underlying assets. For example, if you purchase an ETF that is benchmarked to the S&P 500 index, you essentially have exposure to all the companies within the index without the need to track each individual stock.
Why are ETFs popular among traders?
Traders also value the lower cost of investing in exchange traded funds in comparison to mutual funds. Mutual funds, like ETFs, consist of a basket of investments. ETFs appeal to investors because they usually track market indices; mutual funds appeal because they offer a wider range of managed funds. Mutual funds require far more manpower to manage and are referred to as “actively” managed funds while ETFs are considered “passively” managed. Higher management fees can quickly erode otherwise decent returns.
What are the best ETFs to invest in 2020?
When considering what are the best ETFs to invest in 2020 traders need to consider their individual goals, time horizon and risk tolerance. Coronavirus has turned the global economy on its head and there is no certainty when it will recover completely. There are also opportunities to buy the top performing exchange traded funds at a discount due to the fact that many have not fully recovered from the crash of mid-March. Below we will look at four of the best ETFs to invest in now:
One of the top ETFs to invest in 2020, the iShares growth ETF (IWO) seeks to track the performance of the Russell 2000 Growth Index. Focused on small cap US equities that exhibit growth characteristics the underlying companies tend to be involved in newer industries and disruptive technologies pertaining to IT, health care and software development.
These small cap companies are typically more agile than larger competitors, making them more capable to pivot during times of financial uncertainty. These companies are also more heavily focused on the US market than major players in their industries and as such have significantly less exposure to emerging market risk.
There is a widely held belief that many countries will suffer from substantial economic fallout due to the inability to support their economies during Covid-19 as they do not have the financial resources to offer huge stimulus packages like that of the USA.
Plummeting oil prices offer a valuable opportunity for clean energy. The Invesco Global Clean Energy ETF (PBD) tracks stocks of companies operating in utilities, hydro/solar/wind electricity generation, biofuels and other forms of clean energy. It is benchmarked to the Wilderhill New Energy Global Innovation Index.
While it may seem that lack of demand for energy would make it a poor choice of ETFs to invest in, there are multiple reasons why clean energy should be on your radar. Clean energy, like almost all sectors, did drop significantly in the crash of mid-March however as the global economy seeks to rebound from the Covid-19 crisis clean energy development and investment presents multiple benefits.
Governments suffering from the lack of production due to global oversupply of oil will look to clean energy production as a national security priority in the coming months. Even the US, with its massive shale gas production, will be looking at clean energy technology development as a mechanism for job creation as well as a future buffer to wild swings in production and demand from other countries.
As the economy recovers, consumers will inevitably remember the cleaner air that the crisis allowed for and pressure their governments to reduce pollution, particularly in the worst mega cities which are seeing the best air quality in decades.
SPDR Gold Shares ETF (GLD) is the largest ETF in the world invested directly in gold bullion. The ETF is managed by World Gold Trust Services, which holds over $31 billion USD in vaulted gold, primarily in the UK. The GLD ETF is benchmarked to the market price of gold bullion and is linked to the current price of gold.
Gold is typically considered a “safe haven” for traders during times of uncertain volatility. Due to the sheer size and scope of Covid-19 gold prices initially fell in the early days of the crisis. This was due to investors liquidating their holdings in an effort to cover losses in other areas. Since the initial shock gold prices have skyrocketed as the market has adjusted to the new normal and investors seek to avoid the volatility of stocks.
The GLD ETF has gained over 17 per cent since its initial crash in March, its highest monthly gain since 2012. As the uncertainty regarding the time it will take for the economy to recover continues, analysts are predicting record high gold prices in the coming months. While stimulus packages are necessary to keep economies afloat, such high levels of government spending can also weaken fiat currencies, which will push the demand and price of gold even higher.
Why invest in ETFs?
ETFs provide an inexpensive way to diversify your holdings within a sector, industry or commodity without purchasing a huge number of different securities. They are easily traded on stock exchanges and traders can use derivatives such as CFDs to profit from downturns in the market. Investing in Exchange Traded Funds should be based on your individual risk tolerance and desired outcome.
In times of high volatility and economic uncertainty identifying segments of the economy that should fare better than the average present a great opportunity to utilise an ETF to gain wide exposure. The lower cost and ability to trade them with CFDs makes ETFs a popular choice in comparison to other financial products. Follow the latest market news and trade the most popular ETFs at Capital.com.