ETF (words of Exchange Traded Fund) This is a fund listed on the stock exchange. Individual ETFs may contain shares, bonds and other instruments. ETF fund units can be sold and acquired at any time of the stock market session, as well as shares. In Poland, the first ETFs appeared after 2010.
Most ETFs are so-called index funds. This means that they reflect the stock index – shares in such funds are bought and sold in the proportion in which they appear in the index. An example would be the American S&P 500 index. The index consists of 500 leading Wall Street companies.
ETFs were created as passive products. The purpose of passive investing is to reflect the behavior of a given stock index.
However, ETFs are not only passive funds. Some ETFs are actively managed-they function like traditional investment funds, and their goal is usually to beat the selected index.
What is passive investing? Passive investing is an investment strategy consisting in tracking the market index to recreate its results.
However, the actively managed fund is about developing a result higher than the market, which requires managers who search for companies with the best perspectives.
ETF and traditional investment funds – differences
ETF are funds participating in stock market trade, making them flexible and liquid. By investing in ETF, we can decide to sell shares at any time.
However, in the case of a traditional fund, this is not possible and the waiting time for the payment of funds is longer. To join or give up the fund, you must buy/sell participation units.
ETFs-types
Why do investors choose this way of multiplying money? The advantage of ETFs is to enable fast and fairly wide diversification.
Investing in ETF is not only actions, you can also place money in raw materials and precious metals. Investors most often choose this way when the stock market is overvalued.
ETF funds can be divided into two types:
- Distribution ETFs-from which dividends are regularly paid;
- Arcumulatory ETFs-ETFs reinvesting dividends.
Source: Online Analysis, Business Insider Polska
