Exchange-Traded Fund (ETF) is an index fund whose shares are freely traded on the stock exchange. A selected base index forms the structure. For example, the SPY ETF includes shares of all companies included in the American S&P 500 index. When the composition of the index changes, the management company performs similar actions with the fund.
Similarities and differences between ETFs and mutual funds
ETF is identical to a regular Mutual Investment Fund and has all the advantages that mutual funds have:
⁃ Professional management;
⁃ Low initial investment;
⁃ High liquidity;
⁃ Wide diversification.
⁃ ETF stock price changes during the day;
⁃ Margin trading is allowed with ETF shares, allowing you to use leverage and open short positions;
⁃ ETF stocks have derivative financial instruments, particularly options.
ETF - an instrument for diversifying the investment portfolio
ETF allows private investors to diversify their portfolios quickly. It is enough to buy SPY shares to invest in a broad market index. You can find funds "tied" to almost any index or asset category in the market.
These include the following:
⁃ ETFs for U.S. indices: these include the previously mentioned SPY or other funds that repeat the dynamics of the American index, such as QQQ on NASDAQ 100 or DIA on Dow Jones 30;
⁃ Industry ETFs: investors have the opportunity to invest in entire sectors, for example, in the dynamically growing biotechnology sector (XBI or IBB) or the conservative utility sector (XLU);
⁃ World ETFs: these reflect the dynamics of national markets, such as Russia (RSX), Japan (EWJ), Germany (EWG), etc.;
⁃ Commodity ETFs: allow you to earn money on the movement of assets such as oil (USO), gold (GLD), etc. "with one click";
Currency, bondage, margin, reverse and other ETFs are available to investors. In addition to investor convenience, the advantages of ETFs include low service fees formed by administrative costs, consulting services, and accounting. Due to its mass implementation and lack of active management, the annual commission does not exceed 1%. All dividends paid by the companies in the fund are distributed among ETF shareholders.
Most funds are formed by large investment banks or financial corporations, which is a guarantee of reliability and asset security.
Investing in ETFs is considered more reliable because they involve buying a whole basket of securities. They are especially attractive to conservative investors who avoid risky transactions.
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Risk Warning: This article is not investment advice. If you decide to trade high-risk financial instruments, please consult first with a licensed investment adviser.