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viernes, 2 de octubre de 2015

Why you should consider ETFs in your investment portfolio?

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exchange traded funds

The ETFs, short for Exchange Traded Funds, are the great discovery and solution in the world of asset management, investment, and especially of the particular investment. I invested in stocks, futures, CFDs, forex and bonds, but it was not until the ETFs when I discovered this great ally of the retail investor.

The ETFs began operating in 1993 in the US with the appearance of the SPY, the quintessential ETF of SP 500. The idea is simple: the investor get in a single asset a complete whole stock market, in this case, the S&P 500 index. The construction of the ETF is not so simple, but that does not concern us for now. The idea is that in a single asset, in this case the SPY, we have a basket of the 500 largest US companies. Today the minimum amount payable is $211 which is the cost of one unit.


At first ETFs were designed to cover complete markets. Their predecessors,  especially the Vanguard, were an absolute success doing one thing: copying the market and avoid all the costs of managing an active fund. Later came a vast range of ETF, but the ones that concern us are the ETF that cover complete markets and have the lowest management fees (Expense Ratio).

10 reasons why you should have index ETFs

  • The investor get full diversification.
  • By following the market the ETF surpass 95% of market investors, including investment funds.
  • Their cost of entry is very low.
  • Their commissions are extremely cheap; one fifth or one sixth of what charges an investment fund.
  • ETFs are listed in stock exchanges, so you can buy and sell them at anytime.
  • Investors do not depend on any financial beyond a broker entity through which they can buy/sell  the ETF. It has nothing to do with traditional bank intermediation that only offers its products in a closed format and not an open structure.
  • ETFs are transparent.
  • You can ignore the economic news; you can invest one or several times a year and go.
  • ETFs are incredibly liquid; the investor can sell them instantly at any time.

The investor can practice the passive management; the most successful at long term

ETFs can replicate entire markets whether stocks, bonds or commodities, for example, in their entirety, so that you can be totally diversified. In fact there is no product in the world that diversify so much. For example, the ETF "Vanguard Total Stock Market" replicates all the shares traded in United States, about 4,000 companies (large, large, medium and small) and its benchmark index is the "CRSP US Total Market Index".

It is a transparent product, with a low entry barrier and accessible to everyone, since the investor does not need to have a huge capital to diversify their risk globally.

By replicating the market you have no need to guess where the market will go and also you do not have to make a forecasting that is going to be a loser in the long term. An ETF replicate a market that in the long term always goes up. As numerous studies show, the simple replication outperforms most active funds, pension funds and hedge funds.

With ETFs the investor do not depend on the ability of any manager

Numerous studies show that long-term active funds, and of course the selection of assets individually, do not outperform the market in terms of performance. In the longer term, the greater the difference. If we add the costs of management and brokerage, the difference is very large.

Some ETFs with which outperform the market

Some of these ETFs with which you can overcome that 95% are:
  • SPY - SPDR® S&P 500 ETF
  • BND - Vanguard Total Bond Market Index Fund
  • VIG - Vanguard Dividend Appreciation ETF Index Fund Shares
  • GLD - Gold Shares SPDR®
  • VTI -Vanguard Total Stock Market Index Fund ETF Shares
  • TLT - iShares 20+ Year Treasury Bond ETF
  • IEAG - Euro Aggregate Bond UCITS iShares ETF
  • DX2X - db x-trackers ETF STOXX® Europe 600 UCITS
  • AIA - 50 ETF iShares Asia
With this you can create a simple portfolio of few assets thatyou have to watch once a year, without complicate your life to see what the newspapers say and macro news. The market will work for you year after year.

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