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Exchange Traded Funds (ETFs) are hybrid investment instruments that “mix” the characteristics of mutual funds with other characteristics of stocks.

As in a mutual fund, the investor buys an ETF to have a proportional participation in a portfolio of assets. Another common characteristic with mutual funds is that the ETFs are managed by a professional portfolio manager who charges a commission and they are regulated (for example, for ETFs listed in the United States, the regulation is defined in the Investment Company Act of 1940). .

But unlike common investment funds that are subscribed or redeemed at the share value at the close of the market,ETFs can be bought and sold through broker accounts during the market round and are liquid and priced throughout the day. In this way they can be used for leverage, rental, loan, short sale or any other strategy that an investor in shares wants to carry out.

The volume traded in ETFs has grown exponentially and today represents between 25% and 40% of the volumes traded in the United States markets, which shows how successful they have been.

Let’s see the benefits they have for the investor:

  • Lower costs: By way of illustration and with figures from 2013, the average cost of investing in a mutual fund in the United States was 1.37% of assets under management, while the cost of investing through the average ETF was 0.45%. The main reason for the lower cost is that ETFs generally follow passive strategies where they try to replicate an index (the S&P 500 for example through the SPY ETF) and then they do not have to face the costs of doing active strategies in which the portfolio discretionary manager has to identify value in shares whose price is out of the ordinary. 
  • Better access: Before the existence of ETFs investing in an asset such as gold, emerging market bonds, currencies, volatility was very expensive or impossible except for institutional investors. Due to their nature of being traded in markets, any client with access to an intermediary agent can access ETFs that replicate the exposure to a very varied class of assets. Thus, even retail investors can buy a proportional part of a larger portfolio of assets that they would not have access to individually.
  • Transparency: Not all mutual funds are required to report the positions of their portfolio on a daily basis, so some are managed with the legal requirement to make this composition public at the end of each calendar quarter. In contrast, ETFs with higher volume passive strategies publicize their portfolio on a daily basis, and ETFs with active strategies (which specifically deviate from a benchmark) are required to do so. 
  • Liquidity: By listing and trading on the markets, ETFs can be bought and sold on the secondary market during the market round. They can also be used to take funds, sell short, or whatever else one can do with a stock. This ensures a much broader universe of investors than mutual funds, regardless of the volume to be invested or the term of the investment.

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