Something is happening when we see that, year after year, investors invest more money in investment vehicles such as ETFs. But, to understand what are the reasons behind this strong growth, let's begin by first understanding what ETFs (Exchange Traded Funds) or exchange-traded funds are. An ETF is neither more nor less than an investment fund that aims to follow an index (be indexed) such as the S & P 500 and that is traded daily on a stock exchange like any other listed company. Therefore, if your objective is to replicate an index, what we can achieve is the profitability of the index minus the expenses borne by the management of the ETF, which are generally very low. This means that, if the index S & P 500 rises by 1% or decreases by 1%, the profitability offered by the ETF will be equivalent to the movement of the index.
In the end, an index reflects the behavior of a set of financial assets with common characteristics, whether stocks, bonds or commodities. For example, in the Spanish stock market we have the IBEX 35 (35 largest companies) or, in Japan, the index Nikkei 225. Having exposure to the Japanese economy through a highly diversified portfolio of 225 companies and access with a single instrument such as an ETF means that investors reduce access costs by avoiding implementing them by themselves with higher costs.
The indices are simple to follow and understand, because you know exactly which companies are part of them. In addition, they incorporate a set of values that make the investment diversified and that is one of the fundamental laws of investment: do not put all the eggs in the same basket. In addition, diversification involves reducing volatility (measure of risk) and that is ideal in investments. A frequent question we ask ourselves is if investing following indices contributes profitability but the results show that beating the market is not easy, even for the best professionals. Many investors try to beat the indices to assess their performance but very few generate higher yields in a consistent manner, in the long term or adjusted for risk. Although there is talent in the world of management, once found, there is the future uncertainty of whether it can be repeated again. Therefore, obtaining the behavior of that market represented by an index is a good result in the medium and long term.
In addition, investors value having maximum certainty and efficiency in their investments and, therefore, express their positioning by investing in ETFs, since it facilitates them to obtain the behavior of the chosen indices. This use of the ETFs, which started as something short-term and tactical, has become something more structural and strategic in the composition of investors' portfolios. But, to have greater efficiency in the outcome of an investment, there is a fundamental aspect that must never be forgotten and must always be taken into account: commissions or expenses borne. In this aspect, the ETFs are the star savings product, since their ratio of total expenses is much lower (10-15 times) than the rest of savings products, when they range from 0.07% on average to 0, 30% per year. Know in the future what profitability will exactly give the stock market or «XYZ» bonuses It is quite difficult to know but what we do know in advance is what it will cost to be invested. Paying low commissions translates into a greater advantage in the future and this is a key aspect when it comes to investing and that everyone understands.
However, the most relevant for the saver is the democratization that the ETF has brought to the investment world. Both the small saver, who has 3,000 euros to invest, and the large institutional investor can access the same ETF and be treated equally in terms of expenses since, being a product that is quoted daily, everyone can access it without distinction.
When there is an investment vehicle with a simple operation to understand, that gives daily transparency of your portfolio, it supports low costs and is convenient, that is, useful and profitable, It has all the ingredients to attract many investors and revolutionize the way of investing.
Important Notice: This information is for informational use only and does not constitute an offer to purchase, purchase recommendation or investment request nor should it be treated as investment advice.