Md. Riday Khan

· 24 Nov 2021

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What are ETF's?

Before going into explanation it is important to be clear about the two terms it is an ETF and how it behaves. First, they are investment funds. They are intermediaries that exist between the investor and the market in which you want to invest capital. The second term we need to understand is the stock index, to facilitate the understanding of the latter we would say that it is the average of all the values ​​that make up a particular market; It can be said that it is the data of all the components of a market-centered on a single data.
Now if we can begin to understand what an ETF is. An ETF is strictly an exchange-traded fund, and they are defined as a traded index fund, but what is it? Index funds are defined as investment funds that have a variable return, so they try to replicate the behavior of the stock index. To better understand, let's learn a little bit about its history.

The ETF started when it went back to when it was found that a large portion of investment funds that are classified into equities did not even have the capacity to equal the profitability of the index that served as an indicator. To illustrate this point with an example, we will say the following: When an investor decides to invest in the Spanish stock market, the profit he will make would be less than the IBX35.

Now, when this is understood, the decision to create an index fund, which is easy for the investor or the manager to manipulate. The basis for this is that managers buy the same shares that are creating the index, they also buy them in the same proportion. Thus, the task of investing is not easy, as it does not require in-depth knowledge of the stock market, as well as analysis of firms. However, in addition to simplifying the process, there is also the issue of greater interest, given that the profitability of the index can already be achieved.

So if we try to summarize what an ETF is, we can say that it is a hybrid between an index and a mutual fund. This hybrid serves two main things, firstly, it works to simplify the investment process, secondly, it allows the investor to get the profit given by the index, if there is profit, they are more than just an investment of funds. But what are the other benefits? The answer is yes, let's see what they are.

Advantages of ETFs
ETF
One of its outstanding advantages is that the operating commissions are much lower than the commissions of variable income funds, thus equalizing the profits of the index, not only increases profits but also reduces investment costs; Undoubtedly this is a great advantage for investors. However, this is not the only benefit of highlighting, let's see what else ETFRA has to offer us.

While analyzing the ETF we realized that due to its structure this index fund follows exactly the structure of the index; And because of this, the risk of managers making mistakes when making investment decisions is greatly reduced; That is if the profitability of the funds is at risk. However, ETFs also have some downsides that we need to consider when deciding where to invest our capital.

Disadvantages of ETFs
Before proceeding, it is important to mention one detail that may attract many investors and that is that these commissions are lower than other investment funds but they still have relatively high commissions an investor would pay to pay their investment portfolio. However, we need to make it clear that this point is applicable in the long run. But at the same time, it is important to consider our long-term investments because the annual commission for ETFs is apparently annual but this is something that will definitely define the profitability of our long-term investments.

Another thing to consider is that the performance of this index fund is known as the mandatory liquidity ratio which can reduce it, which must be maintained. There are also commissions that can be said to be confidential, similar to those presented in the rest of the investment fund.

Once the previous issues are clear, this is important, but it is important to consider that although ETF theory was created to equate these to the profit of an index, in reality, it is virtually impossible to do so since these disadvantages exist, our net profit is equal to investing directly in the index. Is not. This is why remember what was mentioned in the previous paragraph, analyze our investment in the long run so that we can have a clearer and more predictable idea of ​​how our investment will behave and if it is the desired net profit we want.

What is the disadvantage of simple fund of index funds?
The main difference can be noticed when we compare the profitability obtained from a stock index; To improve the skills of our readers we will give initial advice to be able to make good decisions. Comparison of profits is essential because when it is done we find that stock market indicators do not reflect the fact that firms have to pay dividends; When we understand this, it is important to emphasize that we have come to the conclusion that the profitability of a fund is much lower than when it comes to investing in the stock market.

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