Introduction: ETF what does it mean?
💡Simple example with an ETF?
Instead of investing in individual actions, such as Apple , Microsoft , Tesla , Google and Amazon , which can be expensive and complicated due to market diversity and volatility, you can opt for an ETF on S&P 500 .
This type of stock traded fund (ETF) offers you a diversified exposure to a basket of shares , including these large companies, without having to buy them separately.
By purchasing an ETF on S&P 500, you invest in a fund that follows the performance of the S&P 500 index, which includes 500 of the largest companies listed on the US stock markets . This means that, by a single transaction, you can benefit from increasing the value of these companies, while reducing the risk associated with investments in individual actions.
How does an ETF work?
Types of ETFs? What is composed of?
✅ Actions -ETFs on indices (eg S&P 500) have shares from hundreds of companies, allowing diversification without buying each action separately.
✅ Bonds -The ETFs of bonds offer exposure to government securities or corporate bonds, being more stable than shares.
✅ goods (Commodities) -some ETFs are based on gold, oil, silver or other natural resources. They allow investors to benefit from price -to -goods fluctuations
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✅ Thematic ETFs -focus on specific industries or tendencies, such as green energy, artificial intelligence or technological companies.
If you want to invest in technology companies , you can buy an ETF that holds shares from Apple, Microsoft, Google, Tesla and more. Thus, you benefit from the growth of the whole sector, without being exposed to the risk of a single company.
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Advantages and disadvantages ETFs:
|
Characteristic |
ETf |
Individual actions |
Mutual fund |
|
diversification |
✅ big |
❌ small |
✅ big |
|
trading |
✅ in real time |
✅ in real time |
❌ Only at the end of the day |
|
Costs |
✅ low |
❌ can be large |
❌ larger (active management) |
|
Flexibility |
✅ big |
✅ big |
❌ limited |
✅ the advantages of ETFs
1. Automatic diversification
ETFs contain several assets in a single tool, allowing investors to diversify their portfolio without buying each action or obligation separately.
💡 Example : If you invest in an ETF that follows the S&P 500 , you benefit from the growth of 500 different companies, without having to buy shares from each one.
📉 Unlike active mutual funds, which have high commissions for administration, passive ETFs have much lower taxes.
✅ Most ETFs have an annual administration cost (TER-Total Expense ratio) between 0.03% and 0.5%, while active mutual funds can reach 2% or more.
💡 Example : If you invest $ 10,000 in an ETF with a fee of 0.1%, the annual cost would be only $ 10. In contrast, in a mutual fund with a 2%fee, you would pay $ 200 per year.
3. Easy trading and flexibility
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You can buy and sell during the scholarship trading hours.
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The price fluctuates in real time, offering opportunities to enter and exit the market.
4. Access to global markets
💡 Example : An ETF that follows the MSCI Emerging Markets index offers you exposure to growing markets in China, India, Brazil and other emerging economies.
5. High transparency
ETFs publish their own assets daily, so you know exactly what you invest . This is different from active mutual funds, which usually reveal the portfolio only once a month or quarter.
💡 Example : If you invest in an ETF on technology, you will be able to see clearly how many actions it has companies like Apple, Microsoft, Google or Amazon.
6. Long -term growth potential
Many ETFs follow stock indices that have had high yields over time. For example, S&P 500 has offered an average growth of about 10% annually over the past 50 years .
💡 Example : If you invested $ 1,000 in an ETF on S&P 500 in 2000, today you would have over $ 5,000, without having bought and sold frequently.
1. You have no direct control over investments
📌 When you invest in an ETF, you cannot individually choose the actions or obligations in the portfolio . If an ETF includes a weak company, you will be exposed to its risk, even if you have not been chosen to invest in it separately.
💡 Example : If you invest in an ETF that follows the companies in the field of technology and a large company in this sector drops suddenly, your ETF will be affected.
2. Hidden costs on trading
📌 Although ETFs have low administration fees, you need to be careful about:
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Trading commissions (if your broker charges taxes for purchase/sale).
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Price spread (the difference between the purchase price and the sales price of the ETF).
💡 Example : If the ETF has a big spread, you can lose money only from the price difference between purchase and sale, especially in volatile markets.
3. Potential yield less than active investments
📉 Because most ETFs are passive and follow an index, they do not try to overcome the market , but only to follow it.
4. Not all ETFs are liquid
📌 Some less popular ETFs may have a low trading volume , which makes it difficult to buy and sell them at good prices.
💡 Example : If you invest in an exotic ETF, such as one on emerging markets in Africa, you may have difficulty selling it quickly without losing money.
ConCluSIonS
ETFs are strong tools for long-term investments, offering diversification, low costs and accessibility. However, they are not perfect and should be used according to your financial goals.
✅ They are ideal for investors who will expose to the market with low risk and low costs.
❌ are not suitable for those looking for fast yields or complete control over investments.
