Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) are investments traded on the stock exchange, much like common stock. Such a fund may contain stocks, bonds and commodities and trades close to its net asset value (NAV). Among exchange-traded products, ETFs are the most popular because of several factors, including their similarity to stock trading and their relative tax efficiency. ETFs have relatively low costs and track an index, such as a bond index or a stock index. The first ETFs date back to 1989 with Index Participation Shares.

A Sci-Fi Boy. Illustration by Elena

Conversely, index funds, also known as index trackers, are investment funds, commonly mutual funds or ETFs, geared to mimic the movements of a particular index regarding a certain financial market and having a fixed set of rules, which is supposed to be held constant regarding volatility or market conditions. Today, tracking may be made with the help of computers. Indeed, while the world has still not been overtaken by robots, many calculations and much financial analysis is achieved using computer models with little or no human input. Such circumstances and style of management are sometimes referred to as passive management. Also, passive management means lower fees than active management.

Moreover, ETFs must be traded by authorized dealers-brokers and it is always better to get qualified tax and fiscal advice regarding one’s investments. Investments and the finance industry in general are a highly regulated industry, in large part because of the possible consequences and because large sums of money are involved. Further, since many long-term investments tie up large amounts of capital for long periods of time, all the pros and cons of investing in a particular venture must be taken into account. Qualified, licensed and authorized financial advisors may help investors decide where to invest their money. Additionally, professional money managers or asset management firms may further direct individuals and companies how to best manage their funds.