The popularity of Exchange Traded Funds (ETF) has been increasing rapidly in the recent years. The ETFs of the Financial Times Stock Exchange (FTSE) 100 list reached its highest performance peak of the year during the month of May.
ETFs are a form of fund investment that trades in exchange stocks. These funds manage several types of assets such as different securities, bonds, or commodities. They are usually compared with mutual investment funds that are formed by a collection of resources from different sources managed by money managers. However, the characteristics and nuances of ETFs has turned this fund into a progressively attractive investment.
One of the main differences between ETFs and mutual or other traditional funds is that the former does not need intermediaries, and investors buy stock within an array of securities. This makes ETFs a passive investment that offers many opportunities, such as diversification. These differences are followed by several benefits for investors.
ETFs Funds Are on The Rise in Europe
Nowadays, there are 17 ETFs tracked in three of the most capitalised indexes on the UK market. Ten out of the 17 operate in FTSE 100 index, which according to global and European trends, are registering high-volume values in the recent years.
The volume of ETFs traded globally accounted for US$4.8 trillion in 2017. Out of the global total, US$802 billion were traded in the European Union, according to Financial Times data. The region has more than 2,200 ETFs products on the market, a figure slightly larger than the U.S., although the volume that the U.S. market produces is fiercely higher as US$3.4 trillion of the global total were raised in the United States.
ETFs in Europe are still a small part of the global volume. However, data shows that investments in ETFs are increasing rapidly in Europe. In this regard, a report published by Morning Star indicates that ETFs managed in Europe will reach €1 trillion by 2020.
Advantages of Exchange Traded Funds
The advantages range from economic benefits to practical nuances that make ETFs an easier and manageable investment method.
- Diversified investments: as stock shares are bought through a basket of securities, investors do not set their capital in particular companies. Instead, the investment is diversified among different companies within the index that the ETF tracks.
- The wide range of alternatives: this method of investment offers a high level of flexibility and versatility due to the broad market opportunities operating in ETF pools. The variety of these funds allow investors to participate in exchange of stocks of raw materials, technology assets, fixed income securities, and many more.
- Low fees and tax efficiency: these advantages may vary depending on the country regulations. Financial moves in ETF may benefit from tax deferral. Operations that are done between one ETF to others are not obliged to pay taxes for that single operation. Furthermore, ETFs are managed passively, therefore, the managing fees are lower than other investment operations that require more economic and human resources.
- Operation flexibility: ETF funds allow investors to buy and sell shares at price shown in real time, contrary to traditional investment funds where the price fluctuates throughout the day and is determined at the end of the sales process. Thereby, the selling and buying times are more flexible than in traditional stock markets where there is a set time range to effectuate the operations. Besides that, this enhances the transparency, as the Net Asset Value is publicly available during the day. Finally, most of the funds do not require minimum deposits. This way, investors are allowed to have more control over their investment.