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What is an ETF? (Exchange Traded Fund)

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

  • What is an ETF
  • How does an ETF work
  • Key characteristics of ETFs

What is an ETF?

ETF stands for an Exchange Traded Fund. It trades exactly like a stock on a stock exchange.

An ETF, or Exchange-Traded Fund, is gaining popularity among investors who look to diversify their holdings at a lost cost.

There is a wide variety of ETFs, but most are passive investment vehicles, meaning they aim to track the performance of an underlying security or index.

There are also actively managed funds that aim to outperform the market, which charge higher fees for the service.

ETFs have features from both stocks and managed funds and are positioned in a sweet spot between the two.

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How does an ETF work?

Investing in an ETF gives immediate access to a wide array of stocks, thereby providing diversification.

Unlike actively managed funds, ETFs are designed not to outperform the market index but to mirror its performance, potentially leading to more stable returns.

Due to their passive management strategy aimed at tracking an index, ETFs typically incur lower fees than actively managed funds, where fund managers charge higher fees to surpass a specific index or benchmark performance by hoping to generate so-called alpha returns.

Additionally, ETFs provide the advantage of liquidity, allowing investors to buy and sell shares at their discretion throughout the trading day.

An ETF holds assets such as stocks, commodities, or bonds. It generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, though deviations can sometimes happen.

However, unlike the fixed share quantity of company stock, an ETF’s share count can vary daily due to the ongoing process of issuing new shares and redeeming existing ones.

Key characteristics of ETFs:

Diversification: ETFs often hold a wide array of securities, providing investors with an easy way to diversify their portfolios.

Liquidity: Since ETFs are traded on stock exchanges, they can be bought and sold throughout the trading day at market prices, which can differ from the fund’s net asset value (NAV).

Cost Efficiency: ETFs generally have lower expense ratios than mutual funds. However, buying and selling ETFs incur brokerage fees, as with any other stock transactions.

Transparency: Most ETFs regularly disclose their holdings, making it easy for investors to understand what they own.

Tax Efficiency: ETFs are structured to allow investors to buy and sell shares without triggering capital gains taxes, making them more tax-efficient than mutual funds.

How to invest in ETF?

Investing in ETFs is a straightforward process that involves a few key steps. Here’s how you can start investing in ETFs:

  • Open an Investment Account: The first step is to open a brokerage account if you don’t already have one. Many brokers offer a wide range of ETFs to choose from, including those focusing on specific sectors, indices, or investment strategies.
  • Research ETFs: Spend time researching different ETFs to identify those that align with your investment goals. Look at the ETF’s focus area (e.g., technology, healthcare, international markets), past performance, expense ratio (the cost of owning the ETF), and asset allocation.
  • Place a Trade: Once you’ve selected an ETF, you can place a trade through your brokerage account. You’ll need to know the ETF’s ticker symbol (a unique series of letters assigned to a publicly traded asset). Decide on the number of shares you want to buy and the type of order:

i) Market Order: Executes the trade immediately at the current market price.

ii) Limit Order: This allows you to set a specific price at which you want to buy the ETF, and the order is only executed if the market price meets or goes below your set price.

  • Consider Rebalancing: Over time, the value of different investments in your portfolio will change, which may lead you to rebalance your portfolio. This could involve buying or selling shares of your ETF or investing in new ETFs to maintain your desired asset allocation.

ETFs vs Mutual Funds

In a way, ETFs are like mutual funds, investing in a basket of securities; however, unlike mutual funds, ETFs are traded throughout the day, just like stocks.

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When evaluated against other investment options, ETFs distinguish themselves in several key aspects. They are known for their lower operational costs, enhanced diversification opportunities, and a growing variety of choices available to investors.

In the comparison between ETFs and mutual funds, one notable advantage of ETFs is their generally lower expense ratios, which contribute significantly to their attractiveness.

Moreover, ETFs tend to be more tax-efficient than mutual funds. Mutual funds, particularly those that are actively managed, often experience higher levels of trading activity, leading to potential capital gains. Additionally, when mutual fund investors decide to sell their shares, the fund managers may need to liquidate securities to facilitate these redemptions, potentially generating further capital gains. In both instances, the investors must bear the tax implications.

The management approach of these investment vehicles also differs; mutual funds are typically actively managed, aiming to outperform a benchmark index, whereas ETFs are often passively managed, tracking the performance of an index (though there are actively managed ETFs available).

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Senior Research

Violeta è entrata a far parte di Leverage Shares nel settembre 2022. È responsabile dello svolgimento di analisi tecniche e ricerche macroeconomiche ed azionarie, fornendo pregiate informazioni per aiutare a definire le strategie di investimento per i clienti.

Prima di cominciare con LS, Violeta ha lavorato presso diverse società di investimento di alto profilo in Australia, come Tollhurst e Morgans Financial, dove ha trascorso gli ultimi 12 anni della sua carriera.

Violeta è un tecnico di mercato certificato dall’Australian Technical Analysts Association e ha conseguito un diploma post-laurea in finanza applicata e investimenti presso Kaplan Professional (FINSIA), Australia, dove è stata docente per diversi anni.

Julian Manoilov

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Julian è entrato a far parte di Leverage Shares nel 2018 come parte della prima espansione della società in Europa orientale. È responsabile della progettazione di strategie di marketing e della promozione della notorietà del marchio.

Oktay Kavrak

Head of Communications and Strategy

Oktay è entrato a far parte di Leverage Shares alla fine del 2019. È responsabile della crescita aziendale, mantenendo relazioni chiave e sviluppando attività di vendita nei mercati di lingua inglese.

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Oktay ha conseguito una laurea in Finanza e contabilità ed un certificato post-laurea in Imprenditoria presso il Babson College. Ha ottenuto anche la certificazione CFA.

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Sandeep è entrato a far parte di Leverage Shares nel settembre 2020. È responsabile della ricerca sulle linee di prodotto esistenti e nuove, su asset class e strategie, con particolare riguardo all’analisi degli eventi attuali ed i loro sviluppi. Sandeep ha una lunga esperienza nei mercati finanziari. Iniziata in un hedge fund di Chicago come ingegnere finanziario, la sua carriera è proseguita in numerose società ed organizzazioni, nel corso di 8 anni – da Barclays (Capital’s Prime Services Division) al più recente Index Research Team di Nasdaq. Sandeep detiene un M.S. in Finanza ed un MBA all’Illinois Institute of Technology di Chicago.

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