Banco Best's investments deputy-director, Carlos Almeida, explains what are ETFs, their risks and what sets them apart from other investment products.
Diversity: ETFs are a simple, effective and inexpensive way to access various assets and financial markets, allowing for a more diversified portfolio. With ETFs you can invest in stock market indices, ensuring a performance similar to the index, with no additional costs. You also get the bonus of having your product managed by an investment management company.
Availability: ETFs can be traded at any moment, depending on their price at the exchange market index.
Liquidity: there are liquidity providers introducing regularly new orders in the market, ensuring ETFs liquidity and the possibility to trade.
Transparency: the issuers periodically disclose details on each ETFs and their Net Asset Value (NAV), which confers a value reference of the original investment to be deduced from charges, translating into real ETFs value.
Cost efficiency: negotiation has lower costs since ETFs can be traded on market. Management fees are also lower than those of mutual funds.
Yes, there are. Find out what distinguishes each type of ETFs:
Replicate a certain index or stock portfolio, allowing investment in a given sector, country or area in one single transaction. They are appropriate for investors that want low risk, since they avoid those inherent to single asset investment.
Reproduce an index or asset portfolio performance. They seek to obtain performances exceeding the variation of their underlying assets, resorting to derivatives.
Management teams select an asset portfolio, based on pre-defined strategies, research and investment processes. They replicate the underlying index by investing in their assets, allowing for larger returns compared to the underlying asset, risk control and volatility.
Exchange Traded Commodities (ETC)
Replicate the performance of commodities indices or allow for direct exposure without trading futures or handling real commodities, such as gold, silver, nickel or zinc.
These ETFs are market traded securities in which the performance is contrary to its' underlying assets evolution. They also benefit from occasional market fall. Reverse ETFs should be considered in a short-term perspective in order to profit from any possible one-off markets fall.
Leverage reverse (Ultra Short)
Are similar to a reverse ETFs with a leverage factor associated. They replicate doubly the reverse position of the daily behaviour of their underlying asset.
Exchanged Traded Notes (ETN)
Are securities with no guarantee, linked to the performance of a given index, created to combine bond and ETFs features. The main risk for ETNs is the issuer's rating: if a negative revision occurs, the ETNs value may decrease, even if there is no variation in the underlying asset.
ETFs issuers must ensure that ETFs market prices (that follow supply and demand) are close to the performance of the index. ETFs price reflect the index value through a fraction. That is: if the index is at 5,000 points, ETFs will value around €5.
Since ETFs intend to replicate an index evolution, return or loss will correspond to that index performance, with an additional management fee.
Also, dividends paid by the index components are accumulated on ETFs performance, which will be diluted when it pays the dividend. ETFs can also pay dividends in the same way common funds do or choose to reinvest that income.
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