The Exchange Traded Funds (ETF) or exchange traded funds are one of the most important and valuable of the latter are decades investment products. With less than 30 years of existence, ETFs offer many advantages, and if used wisely, they can be a good vehicle to achieve your investment objectives.
What is an ETF?
The Exchange Traded Funds (ETF) is an investment vehicle hybrid between investment funds and actions that seek to replicate a benchmark, but can be bought and sold on an exchange, a normal action and current, which does not happen in investment funds, as they are subscribed and settled at net asset value after the close of each session. Also, like stocks, they have a ticker .
On the other hand, similar to mutual funds, they invest in a basket of assets (stocks, bonds, currencies, etc.), thereby favoring risk diversification. Also, they can be both active and passive management, in this article we will focus on talking about passive management ETFs.
It should be noted that there are physical and synthetic replica ETFs . In the former, the manager buys the underlying securities of the index to be tracked, while in the synthetic, the manager buys a swap contract with an investment bank that will pay him the return of the index. Many investors prefer physical replicas, since the investor has real ownership of the underlying, while synthetic replicas do not.
ETFs can replicate a large number of different products . We can find the most classic ones that replicate the S & P500, for example the SPDR S & P500 ETF (SPY) , which is the first ETF launched on the market by State Street Global Advisors, as well as others that replicate more thematic indices: Lithium & Battery Tech ETF (LIT) , Cannabis ETF (POTX) , Uranium ETF (URA) , etc. In this sense, Global X ETFs is the leading manager in thematic ETFs, on its website you can find a wide list of products.
Advantages of ETFs
ETFs can be very useful for investors as they combine the strengths of funds and stocks, all at low cost.
- Diversification
By investing in baskets of stocks, typically stock indices, ETFs are diversified and carry less risk than stocks individually. With an ETF on a market we will have many different stocks in our portfolio buying a single product.
- Transparency, flexibility and simplicity in negotiation
Being a hybrid, it benefits from the flexibility and ease of trading shares, being able to carry out buying and selling operations in real time. This is an advantage over index funds, where operations are slower. Therefore, we can know the value of our investment at all times, which is not the case with investment funds, where we have to wait for the closing of the markets to know the value of our positions.
- Cost efficiency
ETFs are characterized by having reduced commissions compared to investment funds, since their management is much easier, and they do not need a team of analysts to make decisions. Therefore, its final performance is very similar to the indices or sectors that replicate. Another point in favor is that the minimums to be able to access this type of product are very low, which makes it a very accessible product for investors with less equity.
- Performance very similar to long-term indices
When replicating to an index, they seek to have a very similar performance, exactly lower than the commissions charged. Therefore, when buying an ETF it is almost guaranteed that our long-term performance will be very similar to that of the market.
- Possibility of leverage or short investments
ETFs give the investor the ability to leverage against the index and even invest down in it, which is difficult to do in mutual funds. For this reason, it offers new alternatives for speculation, more related to investing in shares than in investment funds. However, for this very reason, some panic occurs in the market if an ETF has many short orders, as it may not have enough cash to satisfy those orders. It is a hypothetical problem, but possible, it would be necessary to look for an ETF with a lot of liquidity to mitigate this risk.
