Exchange traded funds (ETFs): what is it


ETF Fund Concept

Exchange Traded Fund (ETF) is a stock exchange investment fund whose shares are traded on the stock exchange.

Any investor understands that the safest way to invest is not to buy shares of one particular company or one asset, whether it be stocks, bonds or currency, but to form an investment basket consisting of several assets.

Investors know that invested funds need to be diversified, that is, to buy different assets. Moreover, the most difficult is the formation of an investment basket. The fact that investors need to buy different assets is understood. Since in the presence of several assets in the investment portfolio, losses from the depreciation of some assets are offset by income from others.

The most difficult for most investors is the choice of assets themselves. For this reason, mutual funds are very popular, that is, mutual funds, in which managers form investment baskets.

That is, people need ready-made investment solutions and formed portfolios. Such decisions give access to the market to simple investors who do not have experience in investing and who do not understand what stocks they need to buy and on what principle to form an investment basket.

ETF funds and their difference from mutual funds

Like a mutual fund, the ETF fund is a ready-made solution for the investor and offers him an already formed comprehensive investment portfolio. At the same time, the ETF fund has a number of features that distinguish it from mutual funds.

Features of ETF funds that distinguish them from mutual funds:

Mutual investment funds are formed by individual managers, ETF funds are formed by authorized brokers. That is, ETF funds are more universal in nature and they are not as individual as mutual funds.
Due to its versatility, the investor’s costs for servicing an ETF fund are much less than mutual funds, since ETF funds are general in nature, and are not formed separately for each investor.
Mutual investment funds are formed by managers at their own discretion. The rules for the formation of ETF funds are clearly regulated by regulators, including the rules for regulating risks in the formation of ETF funds and the assets that may be part of an ETF fund.
ETF funds usually follow the structure of a specific financial index, that is, are more systematized than mutual funds, which are formed by an individual manager, as he pleases.
Since the rules for the formation of ETF funds are clearly fixed by the regulator, they are more protected than individual mutual funds, which managers often merge.
You can trade ETF funds, as well as other assets at any time during the trading day. The mutual fund price changes daily and the mutual fund can be sold only after its daily revaluation.
An ETF, like any market asset, can be pledged, that is, you can use market instruments such as leverage when trading ETFs. Mutual funds cannot be pledged and market instruments are not used for trading UIFs.

ETF funds and their difference from stocks, securities and other single assets

Thus, ETF funds have all the properties of stocks, bonds and other securities and assets traded on the stock exchange. They can be used as a security measure – a pledge when using such an exchange instrument as leverage. This fact in itself speaks of the reliability of this tool.

At the same time, ETF funds have a complex composite nature. They consist of many assets formed by an authorized organization – a broker, licensed to form ETF funds issued by the regulator.

It should also be borne in mind that when forming an ETF fund, a broker follows clearly defined regulations that describe acceptable risks, as well as clearly define the rules for forming an ETF fund and those assets that may be included in the fund. All ETF funds are formed according to certain, clearly regulated by the regulator principles.

Profitability of ETF funds

Any investor is primarily interested in the issue of return on their investments. ETF funds are a kind of investment portfolio, formed by a specially authorized broker in accordance with the stringent requirements of regulators in certain areas of activity or in accordance with established indices. Thus, each ETF fund has a fairly narrow focus and certain topics.

There is a wide variety of ETF funds. Each ETF fund has its own line of business and different profits. Choosing a fund, an investor chooses the most appropriate ratio of profit and risk for him. There are strict requirements for the formation of ETF funds and for the assets themselves, from which ETF funds can be formed. Thanks to these requirements, investors’ risks are minimal.

Also reduces the risk of the fact that ETF funds are formed from the shares of various enterprises. Thus, losses in the price of shares of some enterprises are offset by profit from the growth of shares of other enterprises.

In addition to enterprise stocks, there are ETFs for commodity assets such as gold, oil, energy, and ETFs for government obligations.

Thus, an investor, buying ETF funds of state obligations, invests in the state economy. For example, an investor from Russia through the Moscow Exchange can invest in the US economy by purchasing US government obligations.

US government bonds are classified as the most reliable. They have an AAA credit rating from leading world rating agencies. The yield on ETF purchases on short-term US government bonds is 6% per annum in rubles (in dollars the yield will be “-” (minus) 10% due to the depreciation of the ruble against the dollar). Thus, the yield on the purchase of US government bonds is comparable to the yield on ruble deposits in a Russian bank. As you can see, the most reliable ETF funds have less profit.

Great profitability gives the purchase of ETF in gold. It is 18% per annum in rubles, which is much more profitable than deposits in Russian banks.

ETFs on corporate bonds of Russian issuers bought in US dollars give even greater profits. Thus, the investor receives double income: from the growth of the dollar and from the growth of the Eurobonds themselves. Such ETFs will bring the investor 20% per annum, which is also much more profitable than deposits in banks.

ETFs in stocks of the largest US companies are very profitable. Again, if they are bought in US dollars due to double growth: the dollar and the shares themselves. In terms of rubles, investors who buy such ETFs will receive 22% per annum.

But the most profitable are ETFs in US IT stocks, also bought in US dollars. They will bring their investors 24% per annum in rubles. The portfolio of this ETF fund includes more than 80 securities of leading US high-tech companies.

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