What is an etf

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En los últimos años, algo que se volvió muy popular son las inversiones, debido a que debido a las expectativas económicas de muchas persons, tratar de conseguir ingresos mediante métodos distintos a la consecución de un trabajo extra es un tema que se ha popularizado. Pero tratando de meterme en eso investment world We can realize that there are many options, from investing our capital in a savings fund that gives us annual interest, to investing in riskier instruments such as derivatives or stocks. But among the entire range there are some that may be strange for those who are just starting out in this world, for this case we will be talking about ETF, a very interesting instrument with many alternatives.

What is an ETF?

Before having access to the explanation that it is a ETF and how it behaves it is important to be clear about two terms. First they are investment fundsIt consists of an intermediary that exists between the investor and the market in which he wishes to invest the capital. The second term we must understand is the stock index, To facilitate the understanding of the latter, we will say that it is the average of all the values that make up a specific market; It could be said that it is the way in which the information of all the components of a market is concentrated in a single data.
Now if we can start to understand what an ETF is. Strictly speaking, a ETF is an exchange-traded fund, and they are defined as a traded index fund, but what is this? Index funds are defined as investment funds that have a variable income, so they try to replicate the behavior of a stock index. To understand it better, let's get to know its history a bit.

The ETF start It goes back to when it was found that a large part of the investment funds that are categorized in equities did not even have the ability to even match the profitability of the index that serves as its reference. To simplify this explanation with an example, we will say the following: when an investor makes the decision to invest in the Spanish Stock Market, the return he would obtain would be lower than that of the IBEX 35.

Now when this point was understood, the decision to create an index fund, which is easy for the investor or manager to manipulate. The basis of this is that the manager would buy the same shares that make up the index, at the same time he would buy them in the same proportion. From this dynamics, not only the act of investing is facilitated, since a deep knowledge of the stock market is not needed, as well as the analysis of companies. But at the same time as facilitating the procedure, there is a point of greater interest, the fact that the profitability offered by the index can already be achieved.

So if we try summarize what an ETF is, we can say that it is a hybrid between an index and a mutual fund. This hybrid serves two main things, firstly, it serves to facilitate the investment procedure, secondly, it enables the investor to achieve the profitability offered by the index, making, if there are profits, they are greater than basically investing in a fund . But does it have other advantages? The solution is yes, let's see what they are.

Advantages of ETFs

One of his most outstanding advantages is that the administration fees are much lower than the commissions of the variable income funds, from this dynamic not only the profits increase by equaling the profitability of the index, but at the same time the investment expenses are reduced; it is undoubtedly a great utility for the investor. But this is not the only advantage to highlight, let's see what else ETFs offer us.

When analyzing the ETF we understood that, due to its structure, this index fund precisely follows the composition of the index; and that is why the risk of the manager making a mistake when making an investment choice is considerably reduced; which, if it happens, would put the profitability offered by the fund at risk. However, ETFs also have some downsides that we have to pay attention when making our decision of where to invest our capital.

Disadvantages of ETFs

Before continuing, it is important to mention a detail that may draw the attention of many investors, and that is that, although these commissions are lower than those of other investment funds, they are still relatively higher commissions than those that an investor would pay to have his investment portfolio. But going deeper into this point we must explain that this point applies in the long term. But at the same time it is important to consider our long-term investments because although the annual commission of an ETF is apparently annual, it is a point that will definitely define the profitability of our long-term investment.

Another point to consider is that the performance of these index funds it can be drastically reduced through what is known as the mandatory liquidity ratio, which must be maintained. At the same time considering that there are commissions that can be called hidden, which are identical to those that are presented in the rest of the investment funds that exist.

Once the above points have been clarified, it is important that we consider that, even when in the ETF theory They were created to equal the profitability of an index, in fact it is practically impossible for this to happen, because as these disadvantages exist, our net income is not the same as that offered by investing in the index directly. That is why take into account what is mentioned in the previous paragraph, analyze our investment in the long term, in order to have a clearer and more approximate idea of how our investment will behave, and if the net profitability it offers is the desired one. . for us.

What is the downside of the simple fund, the index fund?

The main difference we notice when comparing the profitability we obtain from a Stock index; In order to improve the skills of our readers we will give a basic advice to be able to make good decisions. Comparing profitability is fundamental, this is because when we do it we can see that the stock market indices do not reflect that companies have to pay dividends; Once this point is understood, it is important to emphasize that we conclude that the profitability of the funds themselves is much lower than it might seem when compared to the profitability of an investment made directly on the stock market.

ETF behavior

An ETF has a theoretical price; This is calculated based on the factors such as the price of the index, the commissions to be covered, the dividends that exist, among some others. However, this theoretical price is not markedly different from the real price, but it does have a difference in the way it is calculated; This main difference lies in the fact that the real price is based directly on the supply and demand that exists; a very important point to pay attention.

Now, with respect to the liquidity that an ETF has, we are talking about a fact that is endorsed by the entities that have committed to being able to offer a differential that is in the buy and sell.

Para concluir con éxito con este post pondremos un ejemplo de cómo un ETF manager in a real situation. In the event that the price of the ETF increases over the theoretical value of said ETF, the administrator must buy shares of the market, to later be able to create partitions of the ETF; the next step would be to sell them at the moment when the real and theoretical prices balance again.

On the contrary, if the actual ETF price e is below the theoretical value, the manager must buy shares in ETFs and later be able to decompose them, the next thing would be to market the shares on the stock market, this until the theoretical and real prices balance again.

Having understood all of the above, we can say that an ETF behaves according to the index, so if the ETF benchmark increases by 15%, the ETF will also increase by 15%; Conversely, if the index value falls by 9%, the ETF will also fall by 9%. Even though, despite this behavior, profitability is not the same due to the factors previously analyzed.

Another good news is that if you are thinking about invest in ETFs, There is no investment kit, so it may or may not be a very good investment option. Once you, as an investor, have all this information, it's time to make a choice about whether or not to invest your capital in ETFs.