ETFs in investing are exchange-traded funds that combine multiple assets under a single security, making global investing easier. They are an efficient tool for portfolio diversification, with access to a wide range of industries.
- ETFs are tradable securities that allow users to invest in diverse market segments through a single instrument.
- ETFs can cover different sectors and include stocks, commodities, crypto or currencies
- Investors pay capital gains on the returns generated by ETFs in a year
What are ETFs in investing
ETFs in investing are financial tools that bundle assets such as stocks, commodities, or currencies into a single fund. Globally, there are between 11,000 and 12,000 ETFs investors can choose from.
ETFs, or exchange-traded funds, in finance invest in and track the performance of specific sectors or financial assets. They are a basket of multiple assets that people can invest in. Instead of buying multiple AI stocks, for example, investors can buy an AI ETF in a single transaction that includes multiple assets.
Are ETFs regulated investments
Yes, ETFs in investing are financial instruments monitored and regulated by financial authorities. In the Netherlands, the AEX ETF, which tracks the top Dutch companies, is regulated by the Dutch Authority for the Financial Markets (AFM). In the US, a country with over 4,000 ETFs, the SEC regulates them.
Under regulatory requirements, ETF issuers need to disclose holdings and the percentage of allocation, publish prospectuses, and abide by operational standards. This can include making monthly reports and issuing dividends. The goal is transparency in fund management.
How ETFs differ from stocks in investing
ETFs track multiple assets and bundle them under a single security with unique allocations. Stocks are single investment assets that represent a share of a company’s value. In short, ETFs reflect the net asset value of all the stocks/assets in the fund, while stocks reflect a company’s performance and approval or disapproval.
A main distinction is how they are invested. ETFs provide instant diversification, while stocks have a direct connection to a single company.
How do ETFs make money
ETF issuers charge a management fee of around 1%. The fee is calculated as a percentage of assets under management to cover active management and administration costs. This cost is passed on to the investor, who pays fees ranging between 0.1% and 1%, rarely exceeding that amount.
Types of ETFs
With over 11,000 ETFs issued, their purpose has evolved to include sector-specific allocations, investment types, and even risk profiles.
Stock index ETFs
Stock index ETFs track major indices like the S&P 500 in the US or the FTSE 100 in the UK. These funds mirror the broader market by holding a representative sample of companies in the index, with the appropriate weightings. Major issuers of these index funds include companies like VanEck and iShares.
Currency ETFs
In financial markets, currency ETFs consist of funds that hold foreign currencies with varying allocations. Investors can profit when the value of assets in the basket increases. Currency ETFs in investing provide a way to access currencies in new markets without directly trading forex.
Sector-specific ETFs
Sector-specific ETFs track stocks and companies in specific segments such as AI, tech, defense, medicine, or oil and gas. Each fund has its own allocation but primarily tracks the highest-valued stocks.
Commodity ETFs
Commodity ETFs include raw materials and precious metals in their portfolios, such as gold, silver, crude oil, or agricultural products. The advantage of commodity ETFs is the ease of investing without having to store physical materials. They provide indirect exposure to assets such as oil or gold, which can be difficult to acquire in their raw form.
Leveraged ETFs
Leveraged ETFs use financial derivatives to amplify returns, typically aiming for 2x or 3x the daily performance of their underlying index. These funds maintain higher exposure through borrowed capital or derivative positions, magnifying both gains and losses.
Inverse ETFs
Inverse ETFs move in the opposite direction of their underlying assets, providing a mechanism for profiting from market declines. When the tracked index falls by 1%, an inverse ETF rises approximately 1%, offering downside exposure without the need to short-sell.
How to take a position on ETFs
Taking a position in an ETF means purchasing the ETF and holding it in your brokerage account. ETFs can be purchased through online brokers or similar financial platforms. The process requires signing up, completing KYC for compliance, and only investing what you can afford.
Acquiring ETFs in investing is the same as trading commodities, stocks, or crypto. Select an ETF, set the price, and execute the trade. This is not financial advice—investors should research and consult experts before taking a position.
How is an ETF price determined
An ETF’s price is based on its Net Asset Value (NAV). NAV represents the total value of everything the ETF owns (stocks, bonds, or other assets), minus any liabilities, divided by the number of shares outstanding. If the value of the underlying assets changes or if ETF shares are created or redeemed, the NAV changes. Although ETFs trade on exchanges where supply and demand can slightly move prices above or below NAV, professional market participants quickly step in to buy or sell ETF shares. This arbitrage process keeps the ETF’s market price closely aligned with its NAV.
Tax implications of investing in ETFs
For tax purposes, ETF earnings are treated similarly to investments in stocks or commodities. In the Netherlands, fictional gains on the asset will be taxed at 36% starting in 2028. A key advantage of holding ETFs is simplified reporting, as investors don’t need to monitor multiple instruments.
Investors should understand the capital gains on their ETF holdings and calculate taxes based on their country of residence.
Generating and building long-term wealth
Investing in ETFs is a common strategy for building long-term wealth. Over the past 30 years, the S&P 500 has provided an average annual return of 9%. For retail investors, ETFs offer a low-effort, lower-risk way to diversify without constant monitoring.
For investors with more capital available, platforms like Yieldfund offer weekly payouts and interest rates of up to 48%, depending on the chosen investment plan. While this differs significantly from ETFs, it’s another way to access financial markets and capitalize on other sectors.
Whether you’re building exposure to ETFs or adding tactical positions, it’s essential to understand how ETFs work, why they’ve gained popularity, and the costs involved.
FAQ
When did ETFs become popular in finance?
ETFs gained mainstream popularity in the early 2000s, though the first US ETF was launched in 1993. The SPDR S&P 500 ETF (SPY) pioneered the structure, but widespread adoption accelerated after 2000 as investors recognized their low costs and convenience.
Difference between ETFs and mutual funds
ETFs trade on exchanges throughout the day at market-determined prices, while mutual funds transact once daily. ETFs usually offer lower expense ratios and greater tax efficiency due to their unique creation/redemption mechanism, whereas mutual funds may offer access to certain active strategies unavailable in ETF format.
What is the downside of an ETF?
Potential downsides include liquidity issues with thinly traded funds, the risk of ETF closure leading to premature liquidation, and tracking errors in which fund performance deviates from the underlying index. Leveraged and inverse ETFs carry amplified risks that are unsuitable for long-term holding or for inexperienced investors.
Are ETFs available in crypto or just for investing?
Yes, Bitcoin ETFs now directly track Bitcoin prices and trade in standard brokerage accounts, while other crypto ETFs track Ethereum or companies that invest in crypto.
How to invest in sustainable ETFs locally
Sustainable ETFs are increasingly available through major European brokers offering ESG-focused funds. Research funds tracking sustainable indices, verify their holdings align with your values, and check availability.
