ETFs make it possible .
These products are funds and investments whose shares are listed on a stock market .
You can buy or sell them as if they were ordinary shares. We will explain in more detail what ETFs are shortly.
However, what is truly significant is answering the question:
How can ETFs help you improve your savings?
The answer comes from the hand of its nature and its advantages.
What are ETFs?
As we can deduce from its name, it is a type of investment fund. Therefore, to explain well what ETFs are, we must start from the operation of ordinary investment funds.
Basic operation of investment funds
An investment fund is a type of Collective Investment Institution (IIC). In other words, a collective heritage . Investments are made jointly, through a professional management team and under a specific philosophy, set out in the fund’s regulations and known by each of the investors that make up the assets.
What differentiates investment funds from other IICs is that they do not have a specific legal form .
In order to function jointly, the investment fund or, rather, its assets, is divided into shares. Each investor acquires shares by contributing capital to the fund . In other words, investing in a fund involves buying shares.
This is known as ” subscription “. The reverse process would be the sale of shares, which is called “ redemption ”.
The shares are subscribed and reimbursed directly with the fund management company (in charge of their administration), being our counterpart and always guaranteeing liquidity (so that we understand each other: we can make all the subscriptions and reimbursements that we need at any time).
This company issues new shares when necessary and withdraws those that are not useful.
Each share has a certain price, called the net asset value , and fluctuates from day to day according to the market value of the total assets of the fund. In turn, the value of the equity depends on how the investments that the management team has made evolve.
Therefore, we conclude that the price of each share (the net asset value) is obtained by dividing the value of the total equity of the fund on a given day by the number of shares in circulation that day .
The return on the investment is obtained by the difference between the subscription price and the subsequent redemption price.
The difference with ETFs
And at this point we fully enter into what differentiates an ETF from an ordinary investment fund: The shares of an ETF are listed on an organized market , just as if they were shares of any company listed on the Stock Market.
Its sale is not negotiated directly with the management company, but on a stock market .
The net asset value (sale price) of the shares is determined by their quotation on the market. As we can see, investing in an ETF is a combination of subscribing for shares in an investment fund and buying shares directly on the market .
For this reason they are called Listed Investment Funds (ETFs).
There is one more aspect, which is also very important : Given their nature, so that the shares listed on the market are not unstable in terms of their price, these types of funds are usually passively managed . In other words, they have an investment policy consisting of imitating the composition of a market index (it can be fixed income, variable income, raw materials, sector, etc.).
If you want to carry out active management, frequently rotating the portfolio composition , your shares would acquire a different value in the market very easily and quickly. This would make them volatile and unstable.
Thus, an ETF is a passively managed investment fund , which flows with a specific market, since it tries to replicate it (by making a composition of the index that represents it).
We can invest in the entire market with the purchase of shares in a Stock Exchange. It’s like buying stocks that represent, not just a company, but an entire market.