ETF 101: Understanding the Basics
08 August 2019
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All fields required where indicated (*)This five-part educational series will provide you with a better understanding of ETFs, from what they are to how to potentially use them within an investment portfolio. We will look at the main features and underlying mechanisms of ETFs and their market structure. We will also share practical guidance on evaluating an ETF and best practices around trading. In this first part, let’s start with the basics.
ETF 101: Understanding the Basics
ETF 102: The Inner Workings of ETF Creations and Redemptions
ETF 103: Is This ETF Right for Your Portfolio?
ETF 104: Getting the Most Out of Your ETF Trades
ETF 105: Gaining Efficient Access to Bond Markets with Fixed Income ETFs
Options for Investors
An ETF (Exchange Traded Fund) is a diversified collection of assets similar to a mutual fund, though a key difference is that an ETF trades on an exchange throughout the day like a stock. Being relatively low cost, tax efficient, and generally easy to buy and sell, ETFs have become a popular choice for many investors.
As of July 2019, there was a total of 1.684 ETFs domiciled in Europe, accounting for more than € 770 billion in assets under management.1 Through ETFs, investors can gain access to a wide variety of asset classes and strategies—from stocks and bonds to commodities, domestic and foreign markets, individual sectors, alternative investments and sophisticated active strategies. Investors can use ETFs to support a range of their investment goals, whether ETFs form the core of a portfolio or are used to add diversification or manage potential risk.
Key Attributes of an ETF
Low Cost
ETFs are known for their relatively low cost and simple fee structures. Unlike mutual funds, there are no minimum investment amounts beyond the share price of the ETF. Buying and selling an ETF is akin to trading a stock. Therefore brokerage commissions and trading spreads are considerations when evaluating the total cost of an ETF.
Transparency
Underlying ETF holdings are generally disclosed in full on a daily basis, and share prices are updated in real time. Investors can gain up-to-date insight into their range of exposures, which can empower more informed asset allocation decisions.
Tradability and Accessibility
Investors can quickly gain access to different asset classes, geographic regions, sectors, or strategies, from niche to broad. ETFs can offer exposure to investments that might otherwise be difficult to access, such as commodities or currencies. Investors are also able to trade ETFs intraday and employ trading strategies not possible with mutual funds, such as selling short or using limit orders.
ETFs and Mutual Funds Compared
Both ETFs and mutual funds have attractive investor benefits including portfolio diversification and professional management. They also have some key differences of which investors should be aware. Below is a summary comparison of key attributes of each structure.
ETFs | Mutual Funds | |
Pooled fund of securities offering diversification benefits | X | X |
Professionally managed | X | X |
Returns based on fund's underlying holdings | X | X |
Intraday Trading | X | |
Minimum Investment Size | X | |
Sales Commissions (front-end or back-end loads) |
X | |
Trading Spread | X | |
Brokerage Commission | X | |
Transparency | Holdings disclosed daily | Holdings disclosed monthly, quarterly or semi-anually |
Average net expense ratio1 | 0.56% | 1.12% |
Key Takeaways
ETFs are versatile tools for investors, suitable for a wide range of investment goals. Being able to trade ETFs on exchanges like stocks gives investors flexibility to employ different trading strategies and offers a relatively quick way for investors to add diversification to their portfolio. Features such as daily transparency of holdings, simple fee structures, and tax efficient operations make ETFs historically a cost-effective and straightforward investment vehicle.
ETF issuers are continually introducing new strategies, from traditional index-tracking funds to innovative funds constructed around investment themes. As with any investment, investors should carefully evaluate an ETF to determine whether it fits well within their portfolio.
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1 Source: Bloomberg. As of 31/07/2019.Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
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