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Exchange Traded Funds: passive management gains weight

Yes, it's true, why am I going to deny it to you. In finance we have acronyms for everything what you can imagine. If we want to express how the entire economy of a certain country grows, we use the GDP (Gross Domestic Product).

We also have acronyms to analyze the rate at which the prices of all goods and services grow (CPI or Consumer Price Index) and we call APR (Annual Equivalent Rate) to the interest rate including the commissions that a financial institution will charge us for a mortgage, that is, its price.

And today's post is about acronyms. An acronym that for many will not be as well known as the ones we just mentioned, but that in recent years has been heard more and more among investors and analysts. Today we are going to talk about the Exchange Traded Funds or ETFs.

What is Exchange Traded Funds?

ETFs are a investment vehicle which has great similarities with index investment funds, so, in case you have not done so yet, read the articles “Indexed investment funds: the fashionable investment vehicle" and "Saving in the long term: investment funds and pension plans” will help you and greatly facilitate the understanding of this explanation and will contribute to the expanding your knowledge in a field as relevant as savings and investment.

Exchange Traded Funds: passive management gains weight

Main features

More and more investors are changing the traditional investment funds over ETFs or even those who use them as an alternative to the usual investment in variable income, so we are going to analyze their main characteristics and what advantages and disadvantages they present so that, later, you will be the one to decide if this product is what you were looking for. and suits your investment profile.

As we mentioned at the beginning of the post, ETFs share multiple features with index funds:

  • They are passive management funds, which implies that they replicate the behavior of an entire sector, raw material or market. In this way, they seek to obtain the same profitability of the index they replicate, unlike actively managed funds that try to surpass it.
  • They offer significant diversification, the result of this replication to an entire index or market. 
  • Commissions are lower than in actively managed funds, due among other reasons to the fact that the fund's management team is much smaller since they do not carry out this type of management with all the associated costs that this entails.

All these features are shared between ETFs and index funds, although there is a very significant difference although a priori it may seem somewhat minor.

The shares of the Exchange Traded Funds They are traded on the stock exchange as if they were a share of any listed company, thus possessing the same immediacy and transparency as any security listed on the traditional market.

It is also worth highlighting the accessibility of ETFs since they allow investment from very small amounts, helping all types of investors, including those with smaller capital, to participate in them. 

Conquering the market

It is all these particularities that are causing ETFs to be gaining fame among investors professionals and traditional savers.

News such as the long-awaited approval of the Bitcoin ETFs (expected for this year 2021) or how Sustainable ETFs They account for a large part of the investment made during the first months of 2021, they are just one example of the boom that this vehicle is experiencing. 

And you, did you know this form of investment Or do you prefer traditional investment funds to channel your savings? Do you want to train and have more knowledge in this area? You can do in EIP with the Master in Financial Management, Accounting and Management Control.

Project Manager Financial Analysis at Banco Sabadell

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