Exchange traded funds
Exchange Traded Funds are better known under their abbreviation ETF. Taking the word Exchange Traded Fund literally you could describe it as a fund that is being traded on the exchanges or markets.
With an ETF one is not trying to beat the underlying assets which makes ETF’s different from common investment funds. The positive side of this is that an ETF will not go lower than the underlying assets. Exactly tracking the underlying assets is the core value of an ETF.
Why investing in Exchange Traded Funds when their sole purpose is to track underlying assets?
The answer is simple: with an ETF you can trade markets that would otherwise be difficult to trade in. I will give some examples:
Investing in indices with Exchange Traded Funds
Sometimes such a particular ETF is called an index tracker or Index ETF. With an Exchange Traded Fund that is tracking an index you will be able to invest in the whole index without buying the underlying stocks.
For an individual investor buying all these stocks in their proper weighing would be unpractical (the same goes for professional investors). With an Index ETF such as an AEX ETF or DAX ETF you can do that easily.
Investing in a market sector with Exchange Traded Funds
Let’s suppose you would want to invest in all big steel manufacturers from all over the world. These steel companies have a quotation on different exchanges in different currencies. Not very practical to get in and out these trades if you would like to buy and sell the individual stocks especially if you want to take into account the different sizes of these companies.
With an Exchange Traded Fund you would be able to invest in all these companies with one click and automatically the right weighing will be applied.
Investing in basic materials with Exchange Traded Funds
You will be able to invest in gold by just buying gold. Oil is a bit more difficult as you do not want to put a barrel of crude oil in your garden. With an Exchange Traded Fund it is all as easy as pie to take a position in basic materials.
Trading inaccessible markets with Exchange Traded Funds
In countries far away often opportunities arise for investors but there is 1 problem. Most brokers do not offer stocks in these countries. Especially for individual investors these markets are almost inaccessible. With an Exchange Traded Fund however it has al become easy and simple.