ETF are three fashion letters in investments. They are the initials of Exchange Traded Funds. Although they have existed for a long time, the business around them soared in the last 10 years. One of the most important ETF investment companies, BlackRock, reported in a recent document that the global ETF assets in 2000 were US$ 79 bn. In July 2016, the reported assets were US$3,312 bn. Almost 70% of the assets is invested in equities from developed counties. Moreover, in the same timeframe, the number of ETF jumped from 95 to 1,949.
These are some figures, but they do not mention any advantage that explains the current success. To understand it, it is better to learn how they work. An ETF tracks an index, bonds, commodities or a basket of assets. In other words, they just follow what the benchmark does. They are considered as “passive investments”, because the designer of the ETF just creates and launches it. The product tracks the benchmark and the composition of assets can be changed every certain time to adjust the allocation and improve the results.
The advantages compared to traditional mutual funds are several:
- First of all, the cost. Fees are usually less than 1%, while mutual funds can charge between 1% and 3%.
- ETFs work as a share. Mutual funds have a closing price every day, but the price of the ETFs is transparent, because the changes appear immediately as a stock. That also means that you can perform all sorts of strategies, as it would be a stock: stop-loss, sell short, limit orders…
- It is an easy way to diversify, because ETF track very different assets. Diversification help diminish investment risk.
To sum up, ETF are easy, cheap and transparent. These advantages have awoken the interest of investment companies to create portfolios and strategies composed by this kind of assets. Roboadvisors, as Gear Investments, trust ETF as their main product to invest and offer to their customers. In the case of the strategy performs worse than expected, it is easy to change the allocation and substitute them, as the trading price is cheap and it can be made in every moment, not at the end of the day. Definitely, ETF are the future in investments… or maybe, to be more realistic, we are already in the future, because they are dominating the market landscape.