What is ETF? What are the pros and cons?

ETF is a type of passive investment fund that simulates a reference index of a certain asset type and is traded on the stock exchange. This type of fund is special in that it allows investors to buy or sell fund certificates like buying or selling normal stocks.

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What is ETF?

ETF is an acronym for Exchange Traded Fund, which is a type of passive investment fund designed to replicate or re-evaluate an index of a certain asset class. There are no restrictions on the type of asset used for reference, so it can be anything like stocks, bonds, real estate, gold,… if the asset invested in is cryptocurrency then the fund will be called a Crypto ETF.

The special feature of this type of investment fund comes from the fact that although it is organized as a fund similar to other investment funds, it can be traded like a stock on the stock exchange. In other words, investors can buy or sell things like buying or selling normal stocks.

But what to buy and sell from ETFs? Those are fund certificates, which are used to verify whether any investor owns a portion of the fund or not.

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Benefits and limitations when investing in ETF

Because it is a form of investment, investing in an ETF also has potential benefits and limitations that you need to know such as:

Benefits

• Profits come from portfolio diversification because investing in ETFs means investing in many different stocks at the same time.
• It is easier to control risks than investing in an individual stock because in the portfolio fund, when this stock drops, there may be other stocks that increase in price to compensate.
• Initial investment costs are usually not too high and thanks to the funds being passively managed, management costs are lower than other funds.
• There is high convenience and transparency as investors have access to all available features announced by funds every day, helping investors closely monitor their portfolios.
• High convenience when ETF certificates are listed and traded on stock exchanges, thereby allowing investors to make transactions most simply and conveniently.
• The ability to attract foreign investment because this is an indirect form that helps foreign investors enjoy profit rates from good stock portfolios without investment limits.

Limitations

• Paying ETF management fees may cause investors’ returns to not exactly match the index the ETF emulates, not to mention that market changes can significantly impact returns.
• Poor liquidity for some thin ETFs often issued by small companies, these funds often have quite high bid and ask price spreads thereby increasing transaction costs.
• The profits earned can be much lower than if investors themselves invest in a certain stock.
• Although ETFs always try to closely monitor the prices of the underlying assets, under certain conditions, price discrepancies can still occur, thereby giving rise to many potential risks.

How to join ETF?

To participate in an ETF, you or any other investor need to own a certificate of the corresponding fund. And in case you’ve forgotten, this is something used to verify your ownership of a portion of the fund.

Currently, there are two ways for you to own fund certificates:

• Buy directly with the fund management company. This is the way you want to buy in large quantities and must be authorized by the ETF to participate in the process of creating or exchanging fund certificates.
• Buying through fund certificates listed on the stock exchange is the simplest and most popular way at present.

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Some notes when investing in ETF

Similar to investing in any type of asset, investing in ETFs also has many potential limitations and risks, which we mentioned before. Therefore, to minimize these risks, you need to note that:

• You need to clearly define your investment goals before choosing investment funds that simulate any asset type.
• You should only invest in portfolio funds issued by reputable companies with scale and name in the market.
• Carefully check information about fund management costs. Even though this is an insignificant number, you should still pay attention to it.
• Carefully check information about trading costs of the exchanges before investing because an ETF is similar to a stock code.

Conclusion

So we have come to the end of all the information we can share about the ETF concept. Thank you for taking the time to follow and if possible, hopefully, we will have the opportunity to meet again in other content from AZcoin.