An ETF is an exchange traded fund whose shares are traded on a stock exchange. They are bought or sold in the same way as other securities in the stock market..
An ETF consists of shares in several companies. By buying one share of ETF, you invest in the securities of all companies in a country or industry at the same time.
The asset structure of each ETF is guaranteed to repeat the structure and dynamics of the stock index to which it is linked. for instance, ETF shares of Russian companies (FXRL), displays the dynamics of the Moscow Exchange (RTS) index, and US stock ETFs (FXUS) repeats the dynamics of the MSCI USA index.
The ETF rate is less volatile than that of individual stocks due to wide diversification ā some companies drawdowns in the basket are offset by the growth of others.
How much is an ETF
On the Moscow stock exchange ETF you can buy from 500 to 5,000 rubles. Average price ā 1,500 ā 3,000 rubles.
Price examples:
- ETF Price Shares of Russian Companies
- ETF Price US Company Shares
- ETF Price Shares of Chinese Companies
The price of an ETF is the sum of the shares that are included in it (total fund size) divided by the number of securities issued. When they grow, the fund rises in price, when they fall, it becomes cheaper..
ETF Profitability: How Much Can You Earn?
1. ETF with shares of US companies (FXUS)
- Price January 1, 2014 = 1 109Ā ?
- Price January 1, 2019 = 3,135Ā ?
- Five-year return = 182.69%
- If they invested 100 thousand rubles, they would have earned +182 690 rubles
FXUS ā an opportunity to invest in the American economy. This ETF duplicates the MSCI USA index, which covers about 85% of the US stock market. The fund has 557 companies, the largest: Microsoft, Apple, Amazon, Facebook, Google, Johnson&Johnson, JPMorgan, VISA, Exxon Mobil, Bank of America.
2. ETF with shares of Chinese companies (FXCN)
- Price January 1, 2014 = 1,042Ā ?
- Price January 1, 2019 = 2,576Ā ?
- Five-year return = 147.22%
- If they invested 100 thousand rubles, they would have earned +147 220 rubles
This fund repeats the MSCI China Index. It includes 186 companies. The main players are the Chinese giants of telecommunications, finance and information services: China Mobile, Bank of China, Tencent, Alibaba, Baidu.
3. Japanese stock ETFs (FXJP)
- Price January 1, 2014 = 1 004Ā ?
- Price January 1, 2019 = 2,300Ā ?
- Five-year yield = 129.08%
- If they invested 100 thousand rubles, they would have earned +129,080 rubles
FXJP includes more than 300 of the largest and most stable Japanese companies. Highlights: Toyota Motor, Mitsubishi, Sony, Honda Motor, Canon.
4. ETF with shares of German companies (FXDE)
- Price January 1, 2014 = 1,145Ā ?
- Price January 1, 2019 = 1 988Ā ?
- Five-year yield = 73.62%
- If they invested 100 thousand rubles, they would have earned +73,620 rubles
FXDE is a fund that offers to invest in the German economy. The portfolio of 49 companies, including many leaders in their field: Siemens, BAYER, Daimler, Volkswagen, BMW, Adidas.
5. ETF with shares of Russian companies (FXRL)
- Price January 1, 2017 = 1 933Ā ?
- Price January 1, 2019 = 2,394Ā ?
- Profitability for two years = 23.85%
- If they invested 100 thousand rubles, they would have earned +23 850 rubles
FXRL is a stock exchange fund that repeats the dynamics of the Moscow Exchange Index (RTS). It consists of securities of 40 companies, including Gazprom, Lukoil, Sberbank, Norilsk Nickel, Novatek, Rosneft, Tatneft, Yandex, Magnit and X5 Retail Group.
Should I buy ETFs and who are they suitable for
ETFs are bought by novice investors who do not want to take risks. This tool allows you to invest little money in large companies. If you buy the same shares directly, you need to invest more.
Anatoly Mironov, Head of Legal Advice for Legal Entities, Hedge Fund KHRSV LTD explains: āBy purchasing ETFs on the Moscow Exchange Index (FXRL), the investor distributes the amount of investments between 40 shares of Russian issuers: Gazprom, Sberbank, Lukoil, Magnit, Norilsk Nickel, Rosneft and others. At the same time, the price of this ETF is only 2,848 rubles (as of October 1, 2019), and if the investor decides to draw up an investment portfolio that repeats the FXRL structure, then he needs to pay a lot more money ā.
āETF is suitable for beginner investors who are not familiar with the subjective stories of companies. But do not forget that ETFs will not generate revenue in a falling market, because it essentially repeats the dynamics of the market itself.ā- says Anatoly Mironov.
Which is better to choose: stocks / bonds or ETFs
Compared to bonds and stocks, ETFs look like a safer investment. The fund covers several dozen companies, and therefore follows the market. And in the long run, markets always grow.
When investing in stocks or bonds, you need to manage your portfolio yourself: buy and sell assets, monitor their ratio, control risks. Itās harder, but the potential profit may be higher than that of the ETF.
In a nutshell:
- Stocks and bonds. For an experienced investor who is ready to evaluate companies and manage a portfolio himself.
- ETF. For a beginner who wants to protect money from inflation or make a profit no higher than the market (10-12% per year).
Which is better to choose: mutual fund or ETF
Mutual funds (ETFs) and ETFs are collective investment instruments. Each investor decides for himself which option is more profitable and convenient for him, based on risk appetite, volume of investments, degree of participation in investment management. Therefore, choose you, and we will show how they differ.
A mutual fund is suitable for those who do not want to open an IMS or a brokerage account, and who still cannot invest in foreign securities (civil servants). In other cases, ETF has better conditions for a private investor.
Do ETFs pay dividends
For some shares held by ETFs, dividends are paid. Each fund chooses how to dispose of them: give it to its shareholders or reinvest it back into the underlying index. Dividend distribution principle foundation indicates in its policy. These conditions rarely change..
Russian ETFs manage dividends in different ways, but basically, they reinvest and do not transfer them to their investors.
ETF Taxes
In Russia, resident individuals pay 13% on income from personal income tax. Personal income tax should not be considered from the sale price, but from income, that is, from the difference between the sale price and the purchase price, plus the size of commissions. Investments in ETFs are taxed in the same way as in other securities.
The tax will be taken when you sold the ETF, but if you have owned securities for more than 3 years, then you do not need to pay tax.
The tax agent is a broker, that is, he sends deductions to the tax service. And the investor after the sale of shares receives on his account an amount from which the necessary percentage has already been taken.
Conclusion: Pros and Cons of ETF
- ETF is an asset with a low entry threshold and low volatility. With it, an investor with modest investments will cover several sectors of the economy. The fund has such companies in which the price of 1 share may be more than the investorās total capital.
- Compared to mutual funds, ETFs are more profitable and more convenient ā they can be quickly sold or bought with lower commissions..
- An ETF cannot give a profit above the market, like stocks, because it repeats market dynamics.
- Basically, the ETF does not pay dividends, but reinvests them back into the underlying asset. In this sense, the investor does not have additional cash flow.
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Can you please explain what exactly ETFs are and why it is important for individuals to invest in them? Iām curious to understand how ETFs work and what benefits they offer in comparison to other investment options.
ETFs, or exchange-traded funds, are investment funds that are traded on stock exchanges, similar to individual shares. They are made up of a basket of securities, such as stocks, bonds, or commodities, and are designed to track the performance of a specific index, sector, or asset class.
Investing in ETFs offers several benefits to individuals. First, they provide diversification, allowing investors to spread their money across a range of assets with a single investment. This reduces risk compared to investing in individual securities.
ETFs are also transparent, as their holdings are disclosed daily, giving investors a clear picture of what they are investing in. They are cost-effective, with low fees compared to mutual funds. ETFs also offer liquidity, as they can be bought and sold throughout the trading day, unlike mutual funds that are only priced once a day.
Overall, ETFs are a convenient and efficient way for individuals to access a diversified portfolio of investments, providing flexibility, transparency, and cost-effectiveness compared to other investment options.
Exchange-Traded Funds (ETFs) are investment funds that are traded on stock exchanges, similar to individual stocks. They are made up of a diversified collection of assets such as stocks, bonds, or commodities, and provide investors with a way to gain exposure to a wide range of assets with the purchase of a single share.
Investing in ETFs can be beneficial for individuals for several reasons. Firstly, ETFs offer diversification, spreading risk across multiple assets, which can help reduce volatility in a portfolio. Secondly, ETFs have lower fees compared to mutual funds, making them a cost-effective investment option. Additionally, because they are traded on stock exchanges, ETFs provide liquidity, allowing investors to buy and sell shares throughout the trading day.
Furthermore, ETFs are transparent, with holdings disclosed daily, giving investors clarity on what they are investing in. Lastly, ETFs often track specific indexes or sectors, making them a good way to gain exposure to different markets or industries. Overall, investing in ETFs can be a valuable addition to an individualās investment portfolio, offering diversification, lower fees, liquidity, transparency, and exposure to various markets.