Recently, ETF funds have become increasingly popular among investors. Their meaning is that they include a set of shares of several companies of a country, index, sector of the economy and follow their general dynamics. If everything is very clear for experienced market participants, then a new question often arises for newcomers: “What are the pros and cons of ETFs and how are they better than stocks?”.
We decided to ask an expert, a senior analyst at an investment company. QBF – Roman Kuznetsov. And this is what he answered us.
Who is ETF suitable for??
ETFs may cause increased attention for investors who do not have direct access to the instruments of interest to them or do not have sufficient funds to buy them. For example, an investor appreciates the growth of the American economy and is waiting for the market to rise (S index&P 500), however, he does not have the money to invest in a number of shares of index companies, since the price for them can be quite substantial for a beginner. By the way, Amazon.com stocks [NASDAQ 😕 AMZN] today cost $ 1,699 and one can not agree that this is an impressive amount for those who are at the start of their journey.
In such a situation, the choice of a new investor will fall either on futures contracts on the S index&P 500, or on an ETF that tracks the dynamics of the index. The overwhelming majority of investors are reluctant to take the high risks associated with the purchase of fixed-term contracts, therefore they will prefer investing in ETFs.
ETFs Cover More Than S&P 500. They also track the dynamics of stocks of large Chinese, English, Australian, Russian companies or shares of IT companies in the US sector. The cost of each does not exceed 5,000 rubles. This is a very low threshold for entry, which will allow you to cover the entire market and form a very interesting diversified portfolio. The most popular ETFs track the dynamics of a complex position that an ordinary investor is forced to collect from the market (indexes, hedged positions, etc.).
In the case of an independent set of positions, a market participant will be forced to pay a commission for each transaction, which will reduce the overall potential profitability, while for the purchase of ETFs you will only have to pay the operating commission necessary to maintain the activities of the ETF issuer.
What are the disadvantages of ETF??
The disadvantages of investing in this instrument lie in the legal field rather than financial, because unlike the purchase of shares and bonds, the investor does not even partially become the owner of the company or its debt. Consequently, extraordinary events, for example, participation in a company in a major transaction with which the ETF holder does not agree, can have a negative impact on the value of his portfolio, as he will not be able to present papers for redemption.
It is worth paying attention to the fact that ETF funds do not pay dividends, which will lead to the absence of passive cash flow during the retention of these assets. In addition, the ETF structure is not always clear and transparent..
Where can I buy?
ETFs are freely traded on any stock exchange. In the Russian Federation, their largest number is represented on the Moscow Exchange.
The minimum investment amount is about 1,400 rubles per ETF of US treasury bonds [FXMM] or ETF of Eurobonds of Russian companies [FXRB], but do not forget that the threshold of investments depends more on the requirements of a brokerage company than on the cost of a particular instrument.
Bottom line: the pros and cons of ETF
• You can enter the market with a small budget (low entry threshold)
• The ability to immediately reach many sectors of the economy and the market
• If there is no money for shares of individual companies, then you can invest in them through ETF
• Low commissions, relatively independent recruitment of positions
• Complex and not always crystal clear fund structure
• Weak legal form. The investor does not become the owner of the company
• Lack of dividends
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