Exchange-Traded Fund

An ETF (exchange-traded fund), is a negotiable instrument that tracks an index of stocks, commodities, bonds or a basket of assets. Although they are similar in many respects, ETFs differ from mutual funds because the shares are traded like common stocks in a stock exchange. The share price of an ETF will change during the day it is bought and sold. Larger ETFs tend to have a higher average daily volume and lower rates than mutual fund securities, which makes them an attractive alternative for individual investors.

Stock market funds are one of the most important and valuable products created for individual investors in recent years. ETFs offer many advantages and, if used wisely, is an excellent means for achieving an investor's investment objectives.

In short, an ETF is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange. ETFs are offered in virtually every possible asset class, from traditional investments to so-called alternative assets such as commodities or currencies. Furthermore, the ETF's innovative structures allow investors to reduce markets, obtain leverage and steer clear of short-term capital gains taxes.

After a series of false starts, ETFs began in 1993 with the commonly known product with the ticker symbol, "spider" or “spy,” which became the most massive ETF volume in history. It is estimated that over $ 1 billion is invested in ETFs and nearly 1,000 ETF products traded on US exchanges.

Types of ETFs

• Market ETF: designed to keep track of a specific index, such as the S&P 500 or NASDAQ
• ETF Bond: designed to provide exposure to virtually all types of securities available; Treasury of the United States, municipal and international companies, high performance and more.
• Industry and sector ETFs: designed to provide exposure to a particular industry, such as oil, pharmaceuticals or high technology
• Raw materials ETFs: designed to track the price of a product, such as gold, oil or corn.
• Style ETF: intended to follow an investment style or market capitalization approach, such as a large capitalization value or low capitalization growth
• foreign markets ETFs: designed to keep track of non-US markets such as the Nikkei index in Japan or the Hang Seng index in Hong Kong
• Index ETFs: intended to benefit from a reduction in the market or the underlying index
• Actively managed ETF: designed to outperform an index, unlike most ETFs, designed to track an index
• Exchange traded note: essentially debt securities backed by the creditworthiness of the issuing bank; created to provide access to illiquid markets and has the advantage of generating almost no tax on short-term capital gains
• ETFs for alternative investments: innovative structures such as ETFs that allow investors to negotiate the volatility or risk of a particular investment strategy such as currency transfer or writing invitations.

How ETFs Work

An ETF is bought and sold as a stock of the company during the day the stock exchanges are opened. As an action, an ETF has a ticker symbol and the intraday price data can easily be obtained during the day.

Unlike the shares of a company, the number of outstanding shares of an ETF may change daily due to the continuous creation of new shares and the exchange of existing shares. The possibility of an ETF to issue and trade stocks regularly maintains the market price of ETFs based on the underlying securities.

Although intended for individual investors, institutional investors play a crucial role in maintaining liquidity and monitoring the integrity of the ETF through the purchase and sale of farming units, which are a large section of ETF shares that can be exchanged for baskets of underlying securities. When the ETF's price deviates from the value of the underlying asset, institutions use the arbitrage mechanism provided by creating units to align the ETF's worth to the value of the underlying asset.

Benefits of ETFs

• The attractiveness of ETFs for individual investors is:
• Buy and sell at any time of day: mutual funds, in turn, are paid after the market closes
• Lower rates: no sales commission, however brokerage fees are applied
• More profitable: investors have better control over when they pay capital gains tax
• Business transactions: since they are traded like shares, investors can execute various types of orders (limited orders, stop-loss orders, margin purchases) that are not possible with mutual funds.

Disadvantages of ETFs

While they are superior in many ways, ETFs have weaknesses, including:

• Trading cost: if you only invest small amounts frequently, there may be alternatives at lower prices that invest directly with a fund company in an uncounted fund.
• Liquidity: some low-price ETFs have wide buying/selling spreads, which means that you will buy at high spread prices and selling at low spread prices.
• Tracking error: although ETFs generally record their underlying index reasonably well, technical problems can create discrepancies
• Settlement dates: sales of ETF are not settled for two days after a transaction; This means that, as a seller, your funds from an ETF sale are not technically available to reinvest for two days.

Investment Strategies

After determining your investment objectives, ETFs can be used to gain exposure to any market in the world or any industrial sector. You can predictably invest your assets using the stock index and ETFs and adjust the allocation based on changes in risk tolerance and your own goals. You can add alternative assets such as commodities or emerging stock markets, gold. You can get in and out of the markets quickly, hoping to get short-term changes like a hedge fund. The point is that ETFs give you the flexibility to be the kind of investor you want.

What The Future Holds

Innovation had been the trademark of the ETF industry since its inception less than 25 years ago. Undoubtedly, new and more unusual ETFs will be introduced in the coming years. Although innovation is a positive outcome for investors, it is important to realize that not all ETFs are the same. Careful research is required before investing in any ETF, carefully considering all the factors to ensure that the chosen ETF is the best means to achieve its investment objectives.