A tutorial on the funds known as ETFs and Exchange Traded Funds (ETFs). How does ETF earn? and ETF – Exchange Traded Fund Transactions
Exchange Traded Funds (ETFs), or more commonly known as Exchange Traded Funds (ETFs), are mutual funds that are based on any index of investment products such as stocks, bonds, bills and commodities, and reflect the performance of this index to investors.
In this article, we will try to explain stock exchange mutual funds in a way that you can easily understand.
Some investors think for days before investing in a stock. The general purpose of investors is to find shares that will give them a high level of profit, but many people do not have enough time or expertise to read the stock market.
Exchange Traded Funds (we will use the short name ETF in the following article) are funds bought and sold on the stock exchange, just like stocks.
ETFs following a given index provide several advantages such as self-diversification, lower balance and transaction fees, and flexibility. The profitability of investments in the Index ETFs does not refer to the individual performance of the shares, but to the overall performance of the stock market.
ETF holds a number of fund-linked assets, such as stocks, commodities, bonds or bills. Many ETFs follow an index such as S&P 500.
The S&P 500 is an index of the top 500 companies in NASDAQ or NYSE. So when you invest in an ETF that follows S&P 500, you influence 500 different companies with a single transaction. Prior to the emergence of ETFs, investors were acquiring individual shares of each company and attempting to create the same effect through investment plans. This was more expensive than ETFs, as it incurred multiple commission fees and more fees for managing the investment plan.
ETFs are also classified as lanabilir marketable bonds;; that is, you can convert ETFs to cash at any market price. ETFs are liquid financial resources. Therefore the prices are not fixed; changes as they are bought and sold.
ETF History and Advantages
The first successful ETF initiative, the S&P 500 Depository Receipt (SPDR), entered the stock exchange in January 1993. It is currently traded under the name NYSE: SPY. SPY is currently the largest ETF in the world market; It has $ 242 billion in assets.
From 1993 to 2016, when the SPY entered the stock market, a further 1929 ETF entered the stock market.
The reasons why ETFs are so preferred are that index-based ETFs have less cost than actively managed funds and that they can be taken directly as if they are shares, without getting financial advisors together.
Though there is a situation like this; Since 2014, mFund has been offering investors the opportunity to buy and sell managed funds through ASX.
Another important advantage of index-based ETFs is that they offer investors a wider range of investments with less balance.
With ETFs, traders have a more diverse portfolio by making a single transaction – paying a single commission fee. Some ETFs, such as SPY, contain hundreds of shares of companies.
Imagine that you are attempting to trade individually in S&P 500 companies; You need to pay $ 221.30 for each unit of Apple’s stock, $ 1,177.59 for each share of Alphabet, and $ 1,952.07 for each share of Amazon! (Figures are based on Google Finance data dated September 9, 2018).
However, when you buy SPY, you are trading with the shares of these three companies with only $ 287.60 per unit. So you can buy hundreds of shares with a single share.
Main Risks and Disadvantages of ETFs
Each investment has its own risk potential. The main risks of ETFs are as follows;
Market risk – if the market in which the ETF you are investing in declines, the ETF will likely drop as well.
For example, when US stock markets fall, ETFs following S&P 500 will also decline.
Exchange rate risk – if you have invested in an ETF investing in international markets, exchange rate changes may adversely affect the value of your investment.
For example, the value of an ETF that you buy in TL, but buys shares in stock exchanges where the US dollar is valid, may decrease according to the Dollar-TL ratio.
Liquidity risk – it is also possible that you will not be able to dispose of the ETF shares you have invested at the price you want.
For example, there may not be a purchase order for the ETF you are trying to sell. Many ETFs are actively traded, but some are difficult to dispose of at a good price because demand is low.
Not all ETFs are the same. For example, there are many ETFs that have different managers, goals and styles, investing in different stocks. Index ETFs Only one of the ETF types; so it is worth doing good research before buying ETF.
In addition, capital gains from ETFs are generally distributed annually. ETFs give you capital gains as their value grows, and it’s up to you when you are going to dispose of the shares. ETFs can therefore be subject to taxation.
A significant number of ETFs offer investors the opportunity to trade across the market instead of a particular stock. For example, when you buy SPY shares, you buy all of the top 500 companies based in NYSE and NASDAQ.
Investing in ETFs has benefits such as high profitability compared to index performance, low management fees and the ability to make diversified investments with low budgets, as opposed to actively managed funds.
However, the risks of potential changes in the value of assets below ETF, fluctuations in exchange rates, and inability to be disposed of at a reasonable price should not be forgotten.