ETFs: A guide to getting started
Every time Apple’s share price rises, it's not just its direct shareholders who celebrate. Around the world, it's a win-win situation for investors in a wide range of ETFs that track the company’s shares.
Behind cryptic names like the Technology Select Sector SPDR Fund or the Fidelity MSCI Information Technology Index ETF are some of the world’s best-known companies, governments, industries, commodities, currencies and indices. For those who choose to invest in ETFs, the goal is simple: diversify investments and reduce risk. Find out what ETFs are and what you need to consider when investing in them.
What are ETFs?
ETF is an Anglo-Saxon acronym for Exchange Traded Fund.
For example, this type of fund tracks the performance of a particular stock market index (such as the S&P500), a particular sector (such as technology) or an asset class (such as equities or bonds).
João Queiroz, Head of Trading at Banco Carregosa, explains: "ETFs combine the simplicity of trading shares with the possibility of diversifying investment funds.”
One of the main features of ETFs that distinguishes them from traditional investment funds is that they can be traded directly on stock exchanges. This means that they can be bought and sold at a price that fluctuates throughout the day.
There are different types of ETFs:
• Bond ETFs: indexed to government bonds or bonds issued by large companies;
• Stock/bond index EFT: tracks the performance of a specific stock or bond index. For example, the SPDR S&P 500 ETF (SPY) tracks the performance of the S&P 500 Index, while the iShares 20+ Year Treasury Bond ETF (TLT) tracks the index that measures the performance of US government bonds with maturities of 20 years or more;
• Sector ETFs: track the performance of a specific sector, such as technology, finance or healthcare;
• Commodity ETFs (also known as ETCs): invest in assets that are essential to the functioning of the economy, such as oil or gold. An example is the iShares Physical Gold ETC, which offers exposure to the performance of gold;
• Currency ETFs: invest in different currencies, such as the dollar or yen.
To better understand how ETFs work, consider the SPDR S&P 500 Trust ETF, one of the best-known and most popular ETFs on the market. Investing in this ETF means gaining exposure to the Standard & Poor's 500 Index, which comprises the stocks of 500 large and mid-cap American companies. The S&P 500 is one of the main benchmarks of the US stock market and is an indicator of the financial health and stability of the economy. By investing in this particular ETF, the investor gains access to a diversified basket of assets with a presence in various sectors such as technology, healthcare, industrials and real estate.
As this is an exchange-traded fund, it has an associated price that makes it easier for it to be bought and sold. The ETF’s share price fluctuates throughout the day, unlike other funds that check a single daily trade after the market closes, allowing you to set buy and sell prices and giving you more control over your investment strategy. But asset diversification and ease of investment are not the only benefits of investing in ETFs.
ESG ETFs
Environmental, social and governance (ESG) issues are increasingly important in today's world. In this sense, ESG ETFs can help investors get closer to these policies by combining the growth and liquidity potential of traditional ETFs with a focus on good environmental, social and governance practices. These funds only invest in companies that meet strict sustainability and corporate responsibility criteria. In short, they are an option for those who want to invest their available capital without turning a blind eye to the concerns of the planet and society, allowing them to align their investments with their personal values.
ESG ETF are particularly attractive because they allow investors to align their investments with their personal values. In addition, companies with good ESG practices tend to be more sustainable over the long term and can be more resilient in times of crisis.
However, all that glitters is not gold. Some companies may "sell” themselves as sustainable, but in practice they fall short. This is a challenge in selecting credible ESG ETFs, where a specialist advisor such as Banco Carregosa can help.
The benefits of investing in ETFs
There are several benefits to investing in these assets, including:
• Diversification: investing in ETFs is a way of diversifying your portfolio. Through a single security, it is possible to gain exposure to hundreds of different individual stocks. As we saw in the example above, the SPDR S&P 500 ETF (SPY) offers exposure to 500 different US stocks;
• Access to a wide range of markets: investing in ETFs is also a way of gaining access to foreign markets. For example, those looking to gain exposure to Chinese stocks can invest in the iShares China Large-Cap ETF (FXI) and trade in markets such as the UK, Italian or Dutch markets;
• Transparency: the composition of an ETF is transparent. Unlike closed-end funds, investors can know exactly what an ETF holds;
• Liquidity: because ETFs are traded on an exchange, they are easy to buy and sell. It is possible to trade ETFs at any time during stock market trading hours;
• Low costs: ETFs tend to have lower management costs than traditional funds.
Most subscribed ETFs in 2024
Among the most subscribed ETFs by Banco Carregosa clients last year were those with exposure to technology, innovation and digital assets. However, it is important to remember that past performance is no guarantee of future results.
1. iShares MSCI World EUR Hedged
This ETF is aimed at investors who want to benefit from global growth without being exposed to the volatility of the Euro exchange rate. It focuses on markets in the US, Japan and Europe, allowing investors with a global outlook to take a broader approach. It may be suitable for investors seeking security in times of high geopolitical and economic uncertainty.
2. Source S&P 500 EUR Hedged
With exposure to the popular S&P 500 index, this ETF offers investors the opportunity to participate in the performance of the 500 largest companies in the United States. At the same time, the portfolio is protected against fluctuations in the euro/dollar exchange rate. This ETF includes some of the largest and most influential companies in the US, including giants such as Apple, Microsoft and Amazon.
3. iShares Gold Producers UCITS ETF
The iShares Gold Producers UCITS ETF focuses on gold-producing companies, allowing investors to gain exposure to the price of this much talked about precious metal without having to physically buy and store the asset..
4. iShares Markit iBoxx High Yield UCITS ETF
This ETF tracks the performance of an index composed of high-yield bonds, which offer potentially higher returns than investment-grade bonds, but also carry greater risk.
5. iShares MSCI World UCITS
The iShares MSCI World UCITS continued to be a benchmark of choice, posting a positive performance for the year. It was one of the most subscribed funds for investors seeking broad exposure to the global equity market without currency hedging. This ETF has a strong component of US and European companies. Its positive performance has been driven by the continued growth of the technology sector and the gradual recovery of cyclical sectors, which have benefited from increased consumption and business confidence.
How to invest in ETFs
To buy or sell an ETF, you will need the assistance of a broker, bank or professional investment platform.
At Banco Carregosa, clients have several options when investing in ETFs:
• Expert support: our managers guide clients through decision-making and provide personalised support;
• Professional platform: clients have access to GoBulling Pro, a professional trading platform that allows them to place buy and sell orders directly on the markets.
Investing in ETFs is a solution for investors looking to diversity their positions without the complexity of trading a large number of securities. Investors can therefore gain exposure to an index, sector or asset class in a simpler and more diversified way.
To start investing in ETFs, talk to Banco Carregosa’s team of experts with decades of experience, or open an account and start trading with GoBulling Pro. Ready to get started?