Exchange Traded Funds/Index Funds
Exchange Traded Funds offer a broad and diversified exposure to an array of securities making them ideal for diversifying your investment portfolio.
- Lower management fees than traditional managed funds
- Easy access
- Intraday liquidity
- Bought and sold through major stock exchanges like stocks
- Linked to major market indexes
- Suits both shorter term investors looking to hedge or longer term investors that wants to diversify
ETFs currently hold over $500 billion in assets. According to Morgan Stanley this number is expected to quadruple in 5 years, to $2 trillion. The tremendous success of ETFs over the last decade is testimony to the fact that institutional and individual investors feel increasingly comfortable using these vehicles, recognising them as a valuable addition to securities markets. ETFs today are widely used by investment professionals, pension funds, hedge fund managers, arbitrageurs, traders, market makers, financial planners and individual investors alike.
What are Exchange Traded Funds?
Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded in a similar fashion as a single equity. Today, the number of ETFs that trade options continues to grow and diversify. Investors can buy or sell shares in the collective performance of an entire stock portfolio, or a bond portfolio, as a single security. Exchange traded funds allow some of the more favourable features of stock trading, such as liquidity and ease of equity style features to more traditional index investing.
The basics of Indexing using ETFs
An index is a collection of securities intended to represent a given market or market segment. An index can be as broad as the entire stock market or as narrow as a single country or industry. Each index has its own construction methodology, or set of rules for what is included in the index, which is established by its index provider.
Index-based investing offers several benefits, including lower costs than most active management strategies and benchmark-consistent performance. In addition, index funds are broadly diversified since they typically hold all or almost all the securities within the index. This “instant” diversification helps reduce portfolio risk.