An Exchange Traded Fund (ETF) is an investment fund that holds assets such as stocks, commodities and derivatives and is traded on an exchange. ETFs are very complex and each one is different, they can be grouped into “types” of ETF. These include:
• Index ETFs
• Commodity ETFs
• Bond ETFs
• Currency ETFs
• Sector/Industry ETFs
• Actively managed ETFs
We are going to take a closer look at Index ETFs:
The majority of ETFs are index ETFs and track an index such as the FTSE 100. ETFs can even be created to inversely track an index, these are referred to as inverse ETFs and use investments in derivatives to seek a return which corresponds with the inverse of the performance of the index. Inverse ETFs involve additional risks to regular index ETFs due to their exposure to derivatives. ETFs can be an attractive investment due to their low costs, tax efficiency and share-like features. ETFs are cheaper than mutual funds, mostly due to the fact that ETFs do not have to maintain cash reserves and can save on brokerage expenses. The tax benefits of ETFs can be seen in the fact that Capital Gains Tax (CGT) doesn’t need to be paid until the ETF or its assets are sold. This means that though the assets in the ETF may change, money that would otherwise have been paid out in CGT is allowed to remain within the fund where it can continue to accumulate wealth. The most attractive aspect of an ETF is its share-like qualities. As they are traded on stock exchanges, investors can set stop losses, buy on margin and invest as much or as little as they would like.
Inverse ETFs are often used to hedge against losses in physical shares during periods of economic turmoil. If the markets begin to slump, anyone holding physical shares may see the value of their portfolio slump. Investing in an inverse ETF means that investors, who have been adversely affected by market movements, can also benefit from the decrease in the index while they wait for their physical holdings to recover. For instance; if losses are seen in a portfolio, the index will probably be trending downward which will result in a positive result for anyone holding an inverse index ETF. It is hoped that the losses sustained in the portfolio will match or be outweighed by the gains from the inverse ETF. This involves the risk that if the market rallies, losses on the ETF may outweigh the gains on the equities. This saves money on the brokerage fees involved in selling and then buying back your physical shares when the market begins to improve.
• Index ETFs
• Commodity ETFs
• Bond ETFs
• Currency ETFs
• Sector/Industry ETFs
• Actively managed ETFs
We are going to take a closer look at Index ETFs:
The majority of ETFs are index ETFs and track an index such as the FTSE 100. ETFs can even be created to inversely track an index, these are referred to as inverse ETFs and use investments in derivatives to seek a return which corresponds with the inverse of the performance of the index. Inverse ETFs involve additional risks to regular index ETFs due to their exposure to derivatives. ETFs can be an attractive investment due to their low costs, tax efficiency and share-like features. ETFs are cheaper than mutual funds, mostly due to the fact that ETFs do not have to maintain cash reserves and can save on brokerage expenses. The tax benefits of ETFs can be seen in the fact that Capital Gains Tax (CGT) doesn’t need to be paid until the ETF or its assets are sold. This means that though the assets in the ETF may change, money that would otherwise have been paid out in CGT is allowed to remain within the fund where it can continue to accumulate wealth. The most attractive aspect of an ETF is its share-like qualities. As they are traded on stock exchanges, investors can set stop losses, buy on margin and invest as much or as little as they would like.
Inverse ETFs are often used to hedge against losses in physical shares during periods of economic turmoil. If the markets begin to slump, anyone holding physical shares may see the value of their portfolio slump. Investing in an inverse ETF means that investors, who have been adversely affected by market movements, can also benefit from the decrease in the index while they wait for their physical holdings to recover. For instance; if losses are seen in a portfolio, the index will probably be trending downward which will result in a positive result for anyone holding an inverse index ETF. It is hoped that the losses sustained in the portfolio will match or be outweighed by the gains from the inverse ETF. This involves the risk that if the market rallies, losses on the ETF may outweigh the gains on the equities. This saves money on the brokerage fees involved in selling and then buying back your physical shares when the market begins to improve.
No comments:
Post a Comment