ETF – Exchange Traded Fund

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ETF – Exchange Traded Fund

Defination: Exchange-Traded Funds (exchange-traded funds) are an investment vehicle whose policy seeks to replicate the behavior of the assets that

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Defination:

Exchange-Traded Funds (exchange-traded funds) are an investment vehicle whose policy seeks to replicate the behavior of the assets that make up a stock index , whether it is fixed income, equities, currencies or commodities or other financial assets.

We can define them as a  hybrid financial asset , since they maintain similarities with traditional investment funds in themselves, but also with stocks . It has the ability to diversify the funds and the liquidity of the shares. In other words, they are collective investment institutions (IIC) whose shares are listed on the stock market, being settled and traded in real time.

This is the fundamental difference compared to classic funds in which case the net asset value is not established until the close of the session (at which time it is possible to trade with them), while in ETFs the notional net asset value varies continuously as it does. the reference, so that the investor can buy and sell at any time.

In the case of stocks, the divergence is that exchange-traded funds(ETF) – through a single transaction – invest in a highly diversified portfolio (as much as the index they take as reference).

ETF types

The most popular ETFs are those that are referenced to the most important exchanges in the world, that is, those that replicate an equity index such as the Ibex 35 , DAX 30 , Dow Jones Industrial Average , Standard & Poor’s 500 .

However, there are a wide variety of exchange-traded funds that allow trading with more specific matters such as fixed-income, national, monetary, regional indices, according to capitalization, etc.

A special mention deserves the so-called inverse ETFs that operate in the opposite way to the index they reference, that is, they allow you to make money when the indices fall.

Who are ETFs for?

ETFs were originally traded by professional investors. This was the case of the SPDR, referenced on the S&P 500, the first exchange-traded fund in history that emerged in the US in 1993.

In any case, its evolution has led to the participation of all types of investors, both institutional and retail, albeit with a risky profile. That is: with the capacity to assume the risks that may arise from fluctuations in prices in secondary markets (always less than that of the individual acquisition of shares or other financial products because it is a diversified portfolio).

Advantages of exchange-traded funds (ETFs)

As we have indicated, ETFs enjoy great operational simplicity, since it is enough to acquire a single participation to get a whole diversified basket of securities that replicates the evolution of a market, obtaining a return equivalent to it without the costs, time and the effort involved in the continuous buying and selling of the corresponding shares (so we could add that they also minimize risk, at least from the point of view of passive management).

As we also pointed out, there is greater liquidity compared to traditional investment funds, since it is possible to invest and divest in an ETF at any time during the trading hours with total immediacy. Likewise, during this trading period the market calculates and disseminates an estimated value, guaranteeing maximum transparency to the participant (who can know how their investment is evolving).

In general, they are more accessible than traditional investment funds, as they have a lower cost as the subscription and redemption fees are not applied and, in addition, participants in exchange-traded equity funds have the possibility of obtaining dividends.

Finally, to point out an important tax advantage of ETFs, and that is that the share regime is applied to its investors, not that of funds, so that capital gains are not subject to withholding.

Disadvantages of exchange-traded funds (ETFs)

Although we pointed out that the ETF management commissions are lower, it is also true that after each operation there is a purchase and sale commission (which varies depending on the bank).

On the other hand, ETF units, unlike traditional funds, cannot be transferred. To make a change we must sell the listed fund, pay the capital gain, and open a new one, also paying the purchase and sale commission.

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