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ETFs - Investor Academy

 

What is an ETF?

An Exchange Traded Fund (ETF) is comparable to an investment fund. Investments in an ETF are diversified, similar to those in investment funds. An ETF usually follows an index, such as the AEX or the Dow Jones. That is why it is also called index investing or an index tracker. However, ETFs can also follow a certain ‘basket’ of investments in a particular sector or region. The difference with most investment funds is that an ETF follows the price of an index or basket, whilst most investment funds try to outperform that index or basket. Since most ETFs follow the stock market, they are also known as ‘trackers’ or passive funds.

Easy to buy and sell

As the name behind the abbreviation already indicates, ETFs can be continuously traded on the stock exchange. Just like shares. This is an advantage compared to investment funds, which can be traded once a day at one price. So buying and selling ETFs is easy. There is also a disadvantage here. In volatile markets, the bid/ask spread of the ETF may widen. As a result, you may pay a higher price for your buy order or receive a lower price for your sell order.

Usually lower costs than an investment fund

There are active and passive investment funds and there are active and passive ETFs. The main difference between active and passive is that passive funds (investment funds and ETFs) track an index (benchmark) and active funds try to outperform the index. Passive funds therefore require less management by a fund manager than active funds. This has the advantage for investors that the management costs of passive funds are much lower. Generally, we can say that the costs of passive investment funds such as index funds and passive ETFs that track an index are often lower than the costs of comparable active investment funds and active ETFs.

Physical ETFs? Synthetic ETFs?

At ABN AMRO you can trade in a selection of physical and synthetic ETFs:

  • A physical ETF that tracks an index or a basket actually buys investments. Physical ETFs buy the underlying investments of the tracked index one-by-one to get the same return as the index (full replication) or they buy a partial selection of the investments to get the same return from the index (partial replication). The risk profile of physical ETFs is similar to the risk profile of the tracked index.
  • The synthetic ETF that tracks an index or a basket is artificial: no investments are bought. So there are no physical investments as underlying assets. The synthetic ETF mimics the value development. It works with a ‘swap’: a financial agreement with a large financial party. This party guarantees that the ETF will follow the value development of the index. This party receives remuneration for this. The fund manager processes these costs in the price of the ETF, just like the other costs incurred by the ETF. Synthetic ETFs are usually cheaper than physical ETFs. However, the risk profile of synthetic ETFs is often higher than the risk profile of the tracked index. 
 

What are the advantages of an ETF?

  • Easily tracking the index without having to buy and sell a lot of investments.
  • Most ETFs have lower management costs than active investment funds.
  • You can follow the price of most ETFs minute by minute and buy and sell most ETFs continuously.
  • ETFs offer the possibility of a good spread of your investments.
  • There are ETFs for various investments, including shares, bonds and property.
  • You can invest in sectors or themes that are beyond the reach of private investors.

What are the disadvantages of an ETF?

  • You can lose (a part of) your deposit.
  • ETFs also have a price risk. If the index that the ETF tracks falls, the price of your ETF falls. In volatile markets, the difference between the bid/ask spread may widen.
  • A passive ETF never outperforms an underlying index or basket. You do have that chance with an active investment fund. 
  • Complicated ETFs, such as synthetic ETFs, are difficult to understand. They can be difficult to trade and involve special risks.
  • With synthetic ETFs you run a counterparty risk, the risk that the counterparty cannot deliver the value development agreed in the swap agreement.

Investing in ETFs with ABN AMRO

 

Self Directed Investing Basic

You have access to shares and ETFs of a number of Dutch and international stock exchanges. Choice of over 100 investment funds, which you can buy and sell without transaction costs.

For the interested investor:

  • Low costs
  • Make your choices independently
  • News and opinions from our experts
  • Transparent selection

Self Directed Investing Plus

With our professional and reliable platform My Dealingroom, you can place orders 24/7 to buy or sell investments. You can choose from a wide range of investment products.

For the active investor:

  • Easy and reliable platform
  • Professional analysis tools
  • Access to stock exchanges worldwide
  • Also trade in complex products