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Introduction to ETFs

WHAT ARE EXCHANGE TRADED FUNDS?


A simple and useful investment tool

Exchange traded funds (ETFs) are fund-share hybrid investment vehicles that combine the best of both worlds: the diversification of a fund's portfolio and the flexibility that share trading offers.

Units of ETFs are traded and settled as any other share. As opposed to the units of traditional investment funds - that can only be subscribed and redeemed at its net asset vale (NAV), necessarily calculated after the market close - units of ETFs can be bought and sold on the stock market, just as ordinary shares, with the same trading fees.

The second main feature of ETFs is that they are index funds, i.e. its investment policy consists on tracking the performance of a certain index (IBEX 35, DJ EuroStoxx 50, Nasdaq 100, DJ Industrial Average, IBEX Medium Caps...). As the offer of tradable indices grows, so does the variety of ETFs.

Liquidity of ETFs is, in essence, that of the underlying portfolio of securities that make up the tracked index. Access to this liquidity is guaranteed by specialists or market makers that take on the public commitment to placing constant bid and offer prices to the ETFs under their coverage. Price spreads and market depth have to be kept within certain parameters settled prior to their listing, compliance is supervised by the Exchange.

ETFs have opened a broad array of investment opportunities, for institutional and retail investors alike. With one simple trade, ETFs enable investors to get easy and cost competitive exposure to a wide range of asset classes.

 

Main features of ETFs:

 

  • Readily tradable: ETFs are very accessible to investors. ETFs are bought and sold by ordinary financial intermediaries on the same trading hours as shares.

  • Flexibility: ETFs´ trading allows buying and selling at any time of a trading session, with no need to wait till the end of the session to get the net asset value of the portfolio.

  • Transparency: As ETFs replicate an index, the composition of the ETF is available all the time. Real-time information on both the index and the ETF is available during the trading session, so the ETFs prices are easy to verify. The market offers all relevant information on traded products: prices, trading volumes, daily composition of the ETFs portfolio, net asset value and indicative net asset value in real-time

  • Liquidity: ETFs are high liquidity products. ETFs are traded on the Stock Exchange Interconnection System (SIBE) and the investor can buy or sell at any time of the session. Market specialists provide liquidity offering buying and selling positions all the time.

  • Commonly Used: Institutional investors daily operate with ETFs, a product already consolidated in the international markets.

 

Advantages of ETFs:

 

  • Diversification: each ETFs participation represents a portfolio of shares that is traded on a Stock Exchange. The portfolio efficiently replicates an index.

  • Quickness: ETFs provide exposure to a portfolio of shares or bonds in a single transaction.

  • Efficient Cost/ Low Trading Costs: if an investor wants to replicate an index, he should buy all stocks of such an index in his portfolio and do it according to the particular weight of each stock in the index. However, buying ETFs, an investor can replicate the index with a single transaction. ETF do also offer an automatic replication of the index as the tracking and composition of the index is made by a fund manager. They also offer lower commissions than active management products.

  • Completion strategy:&nbspETFs´ management allows strategies that complement those of derivative products.

 

 

 

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