With the vast number of public companies that exist in our market, it can sometimes be tricky when deciding which stock, or stocks, should be the focus of your hard-earned money.
Dividing your attention among a wide range of individual stocks can be challenging -- that is, if you have a full-time job like most of us do. There often isn't enough time to do the fundamental analysis on them.
That's why exchange-traded funds are a great alternative for individual investors. They are securities that trade just like stocks. ETFs aren't shares of a company, though. Instead, they track different indices or select groups of stocks. Some ETFs track other assets, such as commodities, making it relatively easy for investors to make bets that traditionally have required access to the futures markets.
One very popular ETF is the SPDR S&P 500 ETF Trust (SPY) , which tracks the S&P 500 index. Investing in an ETF like this is a great way to gain exposure to large-cap U.S. stocks. It offers investors simple diversification within this asset class. If you instead buy just a couple of large-cap stocks that suddenly suffer fundamental problems, you'll lose capital. Owning this ETF means that the winning stocks offset those losers.
Those are just some of the reasons individual investors might find ETFs useful.
But one of the main reasons a large firm like ours would be attracted to ETFs is their volatility. Certain ETFs are double- or triple-leveraged representations of their indices. This means that on a daily basis, the price of these ETFs doubles or triples that of the indices they track. (Individual investors saving for retirement should probably stay away from these ETFs, though, because the volatility that makes them useful for experienced traders makes them inherently riskier for individual investors.)