What are ETFs and why invest in them

ETF is acronym for Exchange Traded Fund and they are one of the most disruptive inventions in the world of investment: what ETFs are, why they are a good tool to start investing, the advantages of ETFs.

invest in etfs

Born in the late 1980s, ETFs (Exchange Traded Funds) have changed the way we invest. The disruptive drive was not revealed (only) in the first years of this new asset class: ETFs have strongly influenced the investment sector in recent years, even more significantly. But what are ETFs? And why did they change the investment world?

What ETFs are

ETF replicates the performance of an index (equity, bond, sectoral) or a thematic basket of instruments (at sectoral or geographical level). For these reasons they are also known as “index funds”.

ETFs are traded on the stock exchange and are “passively” managed.

Unlike active management of investment funds – in which the manager decides, on the basis of the analyzes available to him, the asset allocation of the instrument – there is no discretion in the investment. For example, the ETF on the Italian FTSEMib index will have all the securities that FTSE Russell, the company that develops the index, has chosen to be part of the basket. With the same weights. A replication strategy, which allows you to have a faithful reproduction of the index’s performance.

Advantages of investing in ETFs

ETFs are highly valued by investors for several reasons:

  • their number allows you to create well-structured investment portfolios, they can be used by both traders and long-term investors
  • they are safe, because the amounts invested are separate from the capital of the company that manages the ETF
  • they have very low costs, they have no entry fees (if not the banks’ brokerage fees) and the management fees are very low (ETFs are passive funds)
  • they are simple and easy to understand

Why invest in ETFs

The importance of ETFs has increased over the years. Small investors with adequate financial culture use them both for trading, since ETFs can be treated like an action with similar strategies (such as stop loss, take profit and similar maneuvers), and to build medium / long-term oriented portfolios.

ETFs have taken on an increasingly important role in the world of investments also thanks to the new possibilities given by FinTech and to the digital approaches to saving. For new, innovative financial operators, ETFs are an ideal investment. Not only for the low costs but also because they are proof of conflict of interest thanks to passive management. And they don’t run the risk of being beaten by their own benchmark (because they faithfully replicate it!).

Simplicity and efficiency are characteristics of ETFs that make them safe investments for managed savings. Building diversified strategies in government or corporate equities or bonds could be decidedly complex: very high costs, hardly accessible minimum thresholds and similar problems, which with ETFs are bypassed.

Be careful, however, that the number of ETFs could also represent a critical issue. Liquidity and reliability cannot always be certain, especially on more niche products. It is therefore essential to select the most reliable tools. Or rely on someone who does it professionally and consciously.

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DISCLAIMER - Finance Drops is a blog that deals with topics related to personal finance, economic growth and savings management. It does not offer financial advice, the analyzes reported are to be considered general contents for information purposes. Finance Drops articles that talk about money cannot guarantee certain results because the possibilities vary according to the ability and economic situation of the reader. Finance Drops, therefore, cannot guarantee the success of the suggested strategies and does not assume responsibility for imprudent choices made on the basis of an incorrect perception of the contents of these pages. Risk Warning: Past performance reported in the articles cannot guarantee future results. Furthermore, products that allow access to leveraged instruments may involve a high degree of risk of loss of capital. All the solutions mentioned offer truly effective protective measures to manage risk, but sometimes it is possible to lose more than you invested.