Exchange Traded Funds, broadly known by its initials ETF, are a kind of security available in Stock Exchange. As they are listed in the markets, they work as stocks, although they have some features from mutual funds.
As a stock, prices move continuously and are always updated, against mutual funds, whose prices are updated when markets are closed. So, investors have permanent information about the value of their positions and can react to change the strategy. As a stock, also, investors can buy on margin, short sell o hold for the long term.
But there are more advantages to be considered. ETFs track indexes, sectors or a basket of securities (for instance, different shares, commodities, bonds), that means, they are linked in their performance with the yields obtained from these investments. Investments are diversified with no effort looking for new securities and trading non-stop. In the finance jargon, this is known as passive management.
Traditional mutual funds develop an active management to outperform the markets. In other words, to get more yield than the indexes or sectors. ETFs just follow the trend of the market and their managers only make some little adjustments to keep the line. This kind of management has an immediate positive aftermath: costs are quite less for the investor. Fees and administrative costs are lower, as they need fewer resources to get results.
So, price transparency, diversification, fewer costs and flexibility are the main advantages. ETFs market has widely developed in the last years. Global flows reached $32.9 bn only in October, but from January the flows come to $194.2 bn, so a recent BlackRock report. Bloomberg ranks the biggest ETF in the US by investment sectors and Morningstar ranks also ETF by performance. Some funds beat 100% yearly return.
T-Advisor, aware of the good performance and advantages of ETF, recommends these products in the investment planning tool.