The concept of an ETF
An ETF (Exchange Traded Fund) is a basket of securities available for buying and selling on the stock market. A variety of assets can be included in this financial instrument: from stocks and bonds, to commodities and other assets.
The price of an ETF changes during the day, as is the case with other assets, forming a price chart that follows all the laws of technical analysis. With fundamental analysis, it is somewhat more difficult: after all, for a quality FA it is necessary to take into account the situation of all of the companies in the basket.
Moreover, some stocks traditionally follow optimistic scenarios and grow «stronger» than the market and on the contrary some are constantly flat. This factor should also be considered when working with ETF’s.
The first exchange traded funds appeared in 1989. They included stocks traded on the American and Philadelphia stock exchanges. Later, a similar instrument appeared on the Toronto Stock Exchange marking a new milestone in the development of financial markets.
Kinds of ETF’s
As mentioned above, there are many ETF’s that differ from each other in a whole range of factors. Consider some of them.
- Market: tracks stock indices such as the S&P 500 and NASDAQ.
- Bond: designed to work with different types of bonds.
- Sectoral: used to monitor the situation in a particular sector of the economy. In agriculture, for example.
- External: tracks overseas markets.
- Commodity: shows the situation for a single product, such as oil.
- Inverse: designed for earnings on a lower base market or index.
- Style: designed to track certain investment strategies.
- Alternative: experimental baskets that allow investors to trade in volatility, for example.
Advantages and disadvantages of ETF’s
Take note of the main advantages of an ETF:
- The possibility of selling and buying at any time, in contrast to mutual funds which can only happen when the market closes.
- Low fees. Only brokerage fees must be paid when dealing with ETF’s. No additional fee will be charged.
- Effective taxation. Capital gains taxes are paid according to the same rules as of other financial instruments, such as futures or stocks.
- Trading opportunities. Traders can use market and limit orders, set stop-loss, and take profit when working with an ETF. This makes trading much more convenient.
In summary: the main advantages of exchange-traded funds are that they are similar to other exchange-based assets and are governed by the same rules and laws.
The disadvantages are as follows:
- Insufficient liquidity. ETF trades do not have so many speculators, therefore these instruments, as a rule, have quite large spreads (a spread is the difference between the bidding and asking prices).
- Although ETF’s usually track their base index well, technical problems can create inconsistencies.
- In contrast to stocks, no dividends are paid on ETF’s. This means there is an absence of passive income. Profit on exchange traded funds can only be made through speculation.
ETF and cryptocurrency
Currently, the SEC (U.S. Securities and Exchange Commission) should soon make a decision on the appropriateness and legality of launching Bitcoin-ETF — a new financial instrument that consolidates the position of digital money in the global financial market. As the name implies, Bitcoin will be used as the underlying asset of such a fund.
According to experts, this step will lead to an increase in investment in blockchain and cryptocurrency and will make the market more liquid and sustainable. There are suggestions that in the event of a positive response from the SEC, the price of Bitcoin will make new historical highs.
The Mastodon crypto branch agrees that this new tool will positively affect the industry and bring it to a new level. Although this optimism is not shared by everyone: the founder of Ethereum, Vitaly Buterin, expressed the opinion that it’s not right that this is taking the attention of the community, and should instead focus on other things. In particular, he talked about popularizing blockchain and its integration into the real sector of the economy.