What are ETFs

Exchange-traded funds are securities that move like an index and reflect it. Compared to other products, they have a very low “tracking error”, ie a slight deviation from the desired index. ETFs are tradable daily, just like stocks on the stock exchange. They therefore differ from investment funds that are traded by a fund company.

ETFs are passively managed products in which the fund manager does not stock picking. Often, computers automatically adjust to the index to save costs.

How is an ETF created?

The creation of an ETF can be done in different ways. A form is the physical picture. Here, a company is founded, which physically buys the shares, which should be in the fund. So the value of society fluctuates just like the values ​​that are in society. To make this “move” accessible to investors, the company issues its own  shares.

What kind of ETF’s are there?

There are ETFs for funds, indices, industries, commodities, countries and regions. Special forms are Short and Leverage ETF’s. A short ETF moves exactly opposite to the underlying index or basket of securities. A short EFT on the DJIA thus makes 1% profit when the DJIA falls by one percent. However, as the Dax rises, the investor also loses.

A Leverage ETF, or leveraged ETF, participates disproportionately in gains and losses of the underlying index. For example, an ETF with a leverage of 2 makes 4% profit when the DJIA makes 2%. The flip side is that the ETF also loses twice as fast when the DJIA slips into negative territory.

etf - exchange traded fund

Image source: Babystreet.ca


What are the benefits of ETFs?

The main advantage of the ETF is its diversification, ie the distribution of money into different sectors, countries or securities. This minimizes the investment risk.
According to FocusShares.com there is also no issuer risk for physically traded funds. For example, if you buy a certificate on the Facebook issued by NASDAQ, you will not have a loss if the NASDAQ goes bankrupt, but only if the Facebook falls.

Demand and supply of ETFs has been increasing in recent years. Goldman Sachs forecasts an ETF-managed fortune of 5.4 trillion euros by 2020, which would be a doubling in five years.

1. Easy Purchase

Investors find it difficult to replicate a complete index by purchasing individual stocks or bonds. Each purchase of a share incurs transaction costs of several euros. But if you invest in an ETF, you can do it with a single transaction. Small investors, in particular, benefit from the low minimum investments , which start as low as 10 Dollars per month.

ETFs are created for various markets, regions and asset classes (eg equities, bonds, commodities). Due to a broader spread, price fluctuations of individual securities are less significant. Equity funds focusing on emerging markets are popular investment vehicles.

2. Transparency

Because ETFs replicate existing indices, their composition is easy to track and track the price trend.

3. Low Cost

ETFs are usually cheaper than traditional mutual funds. As a rule, there are no subscription fees. If ETFs are ordered directly from the issuer, the stock exchange order fee is also canceled and only transaction costs arise.

4. Security

ETFs are part of the so-called special assets and are therefore kept separately from the remaining assets of the asset manager. In case of bankruptcy they remain secured. For banks as a custodian also uses the statutory deposit insurance, which applies to a sum up to 100,000 USD.


RISKS INVOLVED

As with every investment, there is a risk involved in Exchange Traded Funds investing as well.

Price risk: Due to price fluctuations, the value of one ETF may fall. Equity funds are exposed to higher price risk due to stronger price fluctuations. Their percentage share is all the higher, the more risk-affirmative a customer is at the opening of the deposit.

Credit and Issuer Risk: The ETF indices consist of many individual assets. If the creditworthiness of an issuer deteriorates, this will affect the price of the security and, subsequently, the fund.

Exchange rate risk: If individual securities of an ETF are denominated in a currency other than the fund currency, the value of the currency may cause the ETF to lose value.

Interest rate risk: Fluctuations in interest rates, in particular an increase in market interest rates, could lead to price losses. However, when interest rates go down, the price of fixed income securities usually rises. Each of the risks is at the same time a chance to increase in value.

Most popular Exchange Traded Funds:

here is the list of symbols :

  • MSCI World Index
  • iShares
  • Vanguard
  • Sprott Gold Miners
  • Health Care Select Sector
  • FMU Symbol FocusShares
  • FHC Symbol FocusShares
  • FCL Symbol FocusShares
  • FCD Symbol FocusShares
  • FBM  Symbol FocusShares

ETF Comparison Tool

Please click and visit TdAmeritrade.

Difference between ETF Investing and Forex  trading via CFDs

Recently I have been receiving many questions from newbies about the difference between CFD and ETF investing. People who want to speculate in forex via CFDs must understand that it is way more riskier than ETF. Why ?

Difference is big. While in ETF you buy LONG and go longterm (meaning years more than months) with Forex you go and speculate where will the price of underlying asset (currency pair for example) go. You speculate using high margin and close the deal within minutes,hours  (daytrading) while with Exchange traded funds you are true investor.

The leverage that makes forex so tempting is not present in Exchange traded funds of course.  Go check global-view.com forex guide for more information on trading currencies.

 

Do you have questions ? Comment below!

6 Comments

  1. Cool stuff guys. What is the right ETF for a total newbie ? P.S. I want to get dividends and my initial investment is $10k

    • Hi Clint! Well we can recommend any fund that contains a good mixture of stocks. Generally anything from iShares, Powershares, Vanguard would suffice.

      I hope this helps.

  2. Michael congrats nice article! Please come with more quality content like this in future.

    One question may I ?
    Some content on the site seems outdated, please do you plan to do update it anytime soon? Thx

    • Yeah we plan to update the blog section in the upcoming months by adding new interesting articles about trading. Adding new software for our clients will be also reflected on the main page. Stay tuned!

    • Hi Josh, nice to hear from you!

      well if you are just starting out in ETF investing, then I would recommend the following two books:
      1. ETF Investing for Dummies
      2. INDEX FUNDS and ETFs by David Schneider

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