Important Facts About ETFs

Although mutual funds have been a leading investment strategy for over the last decade, there is a growing popularity of yet another solution – Exchange Traded Funds, or ETFs. They can further diversify your investment portfolio and allow you to trade on a daily basis. Although some people may think ETFs are not the best option for long-term investments, there are opinions, though, that this kind of funds can bring much more return than mutual funds.

Because the fees and operational costs within exchange mutual funds are lower if compared with those of a typical mutual fund, ETFs may significantly raise your capital.

SPDR is one of the most popular exchange traded fund these days. It operates indices from the Standard & Poor's stock. Although operational costs of this passively managed fund are rather low, your investments aren’t secured in case the companies from the S&P list fail to generate enough income. Thus, if indices are dropped, so will your income in SPDR.

Another exchange traded fund attracting lots of attention is iShares. Because its portfolio is diversified amongst over 200 funds, your investments are backed up and secured. What’s more, this fund is actively managed and ensures huge diversification and return.

And now, let’s look into some facts about the history of ETFs. The first ETF was created about a decade ago and by 2002, it increased its capital to $100 thousand millions. Since then, the capital has grown to more than $1 thousand billions and the number of ETFs operating at the U.S. market has reached one thousand funds. In 2011, the share of ETFs in the market has reached one tenth. If the trend continues to move in the same direction, exchange traded funds will become perfect candidates to replace mutual funds.

As of 2011, the largest ETFs are as follows:

  • iShares with its assets under management of about USD 500 billion
  • SPDR with its AUM of USD 300 billion
  • Vanguard (AUM is USD 175 billion)
  • A rather prospective ETF is WisdomTree (AUM is about USD 15 billion)
As the history shows, the more diversified is ETF’s portfolio, the more income it can generate. Because of volatility, there are high risks of this or that market failure. If portfolios are diversified, they are backed up by different assets ensuring that your investments have all the chances to generate more income without heavy losses.


Tags: Investment Finance

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