ETF: What are ETFs? ETF explained the simple way:
ETF Definition: Exchange Traded Funds – Exchange Traded Index funds
An ETF (Exchange Traded Fund) is an exchange traded index fund that tracks the Performance of an Index, such as the S&P 500, Down or DAX. At its core, ETFs combine the benefits of Stocks and Funds in one product.
ETFs allow you to invest inexpensively in entire markets with one security. In addition to Equities, ETFs allow You to invest in many other Asset classes. Due to this Variety, ETFs are perfect Building Blocks for private Investment. ETFs simply replicate a Market Index one on one and can – like a Stock – be traded on the Stock exchange at any time. ETFs offer the following Advantages: They are cost-effective, transparent, broadly diversified, flexible and liquid.
An ETF is an exchange-traded Index fund
What is a Fund?
An Investment Fund is a pool for Investment funds. In simple terms, many Investors put their money together and give a professional (Fund Manager) the order to invest the capital as profitably and broad as possible as part of a given investment Strategy. The Investment Strategy Specifies which Asset classes (such as Equities, Bonds and Commodities) the fund managers are allowed to invest in.
The peculiarity of an Investment Fund is that the investor funds are a special Asset, held in trust by a custodian bank and legally separate from the Fund Company’S Assets. For this reason, the investor funds are also protected in the event of insolvency of the fund company.
The manager of a traditional mutual fund Is tasked with achieving a higher return than that of the respective benchmark by buying and selling investments. However, according to scientific studies, only very few fund managers succeed in this long-term.
Index fund – What is it?
The provider of an index fund ensures that it tracks the development of an index as accurately as possible. The investments of an index fund are precisely determined by the Index. Indices are market barometers that make the performance of entire markets tangible.
An Index Fund has the great advantage that you, as an Investor, also know what you are invested in at all times. Because the composition of the underlying Index, such as the S&P500, Dow or DAX, is always known. The Dow Jones Industrial Average Index (Dow) contains the Shares of the 30 largest US Public Companies weighted by their Size (as measured by the free float market capitalization).
The index replica does not require complex analysis of title selection for index fund/ETFs (compared to active Investment funds). For this Reason, the ETF provider receives only a small annual fee for its Performance.
Exchange traded Index fund – What does that mean?
Like Stocks, ETFs are traded on the Stock exchange. Therefore, You can buy and sell ETFs at any time during the opening hours. By comparison, traditional mutual funds are traded only once a day through the Fund Company.
While Mutual funds typically incur high expenditure premiums, stock exchange trading of ETFs results in only the broker order fees and a mostly small difference between the sell and buy prices, called the “spread”.
Why have I never heard of ETFs?
ETFs Are unpopular products among commission-oriented Financial Advisors and banks. Because these advisers usually live from commissions paid to them for the brokering Of financial products by the respective Fund Providers. However, these commissions do not exist for ETFs. For this reason, ETFs are now recommended almost exclusively by Fee Advisors.