How do I invest in Exchange Traded Funds?

Two questions will assail you: where can I hire them? and what contract?

Most of the exchange-traded funds are divided between Stock Funds and Bond Funds. Stock Funds account for almost 80% of all Exchange Traded Funds.

Stock Funds -Stock Funds-

  • They replicate the Stock Indices (eg the Euro Stoxx 50, the 50 most important companies in Europe). They move in the same way as the indices and they also pay you the dividends given by the shares that make up the index in proportion to what you have invested.
  • It has a higher return in the long term than other assets, but it also carries more risk. In the short term they go up and down.
  • Among different funds that cover the same index, always choose the cheapest one. This is due to the fact that it has greater liquidity and the policy of the company that sells them is more efficient.
  • The broader the Index, the more diversified it is and the less risk it carries. The Euro Stoxx 50 is not the same as the Euro Stoxx 600. For long-term investment I would always invest in the latter.
  • Therefore breadth (diversification) and low cost (efficiency) should be among the main criteria.

Bond Funds -Bond Funds-

Bonds are fixed income securities. Instead of capital, it is debt issued by companies or public entities such as governments or municipalities. They pay an interest rate called a coupon and the principal is paid at maturity.

The Bond Funds replicate indices of groups of entities that issue debt or bonds.

Buying bonds at a private level can be difficult and you depend on the ones that your financial institution sells. However through exchange traded funds it is as simple as buying or selling a share.

A share does not have different types, however a bond does – high yield, municipal, state, corporate – and also with different maturities. A traded fund simplifies all this for you since when replicating complete indices it includes the entirety. The most important Bond (listed) Fund is the Vanguard’s Total Bond Market Index (BND) and invests in all segments and maturities of US corporate fixed income and government debt.

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