Have you ever wondered what instruments can help you grow your money? Surely yes, but, generally, you don’t know which ones are the most suitable for you. That is why we want to explain to you what is Listed Investment Funds, better known as ETFs?
There are many investment options on the market to diversify your capital. One of them is ETFs (Exchange Traded Fund) for its acronym in English, also known as exchange-traded funds.
What is an ETF?
It is an investment fund that is listed on a Stock Exchange, that is, it can be easily bought or sold as if you were buying individual shares.
Its objective is to replicate the behavior of a stock index (such as the IPC, Dow Jones or the S & P500, among others), raw materials (such as gold or oil), an exchange rate (peso, dollar or euro, for example), underlying assets (debt securities, sectors, countries, among others) and mathematical logarithms.
In this sense, ETFs allow you to have an investment as diversified as the index to which it is referring or the asset class. For its negotiation, an ETF is and behaves like a share and identifies with other shares, for example, Facebook.
Knowing that this type of instrument is listed on the Stock Market, perhaps it can generate concern when associated with a variable income asset, but do not worry, there are also different types of ETFs and specialized in debt for investors with a more conservative profile.
How is an ETF formed?
ETFs are formed like any investment fund diversified in different financial instruments, the difference is that these funds are publicly traded.
For example: If you acquire an ETF that replicates the behavior of the United States index, Nasdaq 100, it means that you are investing in a diversified basket of the 100 most important companies in the technology industry, such as: Facebook, Apple, Amazon, Alphabet and Microsoft Were they familiar to you? Now imagine investing in all of them in a single action. Interesting, right?
How to invest in ETFs?
Through a financial intermediary. The instrument can be obtained directly or through a diversified investment fund with ETFs.
Regardless of what you are looking for, ETFs allow you to complement your investment. For this reason, we recommend you approach a financial advisor, who will help you find the best investment option according to your profile and horizon. And remember, diversification is the best way to get a good return on your investment.
Basics for investing in ETFs
Exchange-Traded Funds (ETFs) are instruments that are perfectly suited to individual investors who have limited capital and seek to diversify their opportunities and risk. But what makes ETFs so recommended for investors with these characteristics? In this short article, we will try to highlight the main aspects of this type of financial tool.
First, the definition: an ETF is an investment fund that seeks to replicate the behavior of some underlying (which can be an index of stocks, the price of a commodity, the price of a set of bonds, etc.), whose shares- parts or participations are traded on the stock market. This last element is what differentiates, in simplified terms, an ETF from a Mutual Fund: the ETF can be traded on the stock market, just as if it were the common stock of a company: it can be bought or sold at any time that the stock market is open and it is not necessary to wait until the end of the day to finalize a transaction.
Although Mutual Funds are a fairly old concept in the financial market (they originated from federal law in the United States in 1940), ETFs are a much later concept and their origin were in 1993, when they were listed on the American Stock Exchange. the first ETF was listed, with the aim of replicating the behavior of the Standard & Poor’s 500 indexes.
Currently, the universe of ETFs is extremely wide and allows any investor to access practically the market, sector, region, raw material or groups of commodities that they want. It is an instrument that allows diversifying the destination of the invested funds at a very low cost, these two elements being the keys to ETFs from the investor’s perspective.
One of the main postulates in finance is that of diversification, which establishes that for an investor it is essential to diversify their loans, avoiding concentrating them on a few instruments. The trade-off that arises immediately as a consequence of diversification is operating costs, in the sense that the more a portfolio is diversified, the more expensive its maintenance and operating costs will be. ETFs, precisely, allow you to tilt this trade-off in favor of the investor.
Suppose an investor, for diversification purposes, decides to place a portion of his funds in gold. If you were to go to the physical purchase of the metal, you would incur a cost of keeping the raw material in a safe deposit box, as well as a relatively very high transaction cost and minimum operable amount. Alternatively, you can turn to an ETF, for example, the SPDR Gold Shares (GLD), which seeks to replicate the price of gold: in other words, if the price of the precious metal rises 1% during the day, the price of the ETF will rise. also 1%. The cost of this instrument is identical to operating a common share on the stock market, with a management cost of its administrator of only 0.4% per year.
Let’s now think of an investor who wants to take a position in the S&P 500 stock index, as one of the most representative indicators of the US stock market, because he believes that the price of shares in that country will rise, but does not want to expose only to a specific action or a small group of them but to 500 of the largest and most representative of that market as a whole. The index as such is not tradable, so to achieve your objective you can resort, for example, to an ETF that replicates the indicator. In our example, you can buy the SPDR S&P 500 ETF (SPY), with a running cost of just 0.0945% per year, and get the exposure you want.
Finally, consider the case of an investor who wants to diversify his savings in a portfolio that combines fixed income and variable income instruments, for example, bonds and stocks. Let’s say you are looking for 50%/50% exposure in both categories. Given the same limitations that we mentioned before in the case of gold, trading bonds may not be the most efficient in your case, or it may not even be possible, given the minimum investment amounts required by these instruments. With ETFs, however, it is possible to build a portfolio that provides the desired weighting in each type of instrument, with a very efficient cost structure.
In conclusion, although we will go into detail in subsequent articles, the fundamental element that an investor has to value in trading ETFs is that they provide access to a highly efficient diversification/cost combination. And additionally, they allow you to access asset classes that you could not directly access otherwise.
Probably wanna read:
- Is it possible to save money and turn it into more money?
- 6 Thinks to understand before investing in real estate
- Is it interesting to invest in gold?