Why investing money in Exchange Traded Funds (ETFs)?

Good morning our dear investors.
​Today here at HNFC we decided to share with you our knowledge about Exchange Traded Funds.

Let’s imagine you have a little amount of money and you want to invest it.
The first and the biggest problem which you’ll face, as every investor is how to manage your risk.

If you invest your entire capital in one stock, you put yourself in very risky position. If  share price goes up by 10% you earn proportion of that amount as your portfolio is very unlikely to have 100% of capital invested in one stock. If it goes down by 10% you lose the proportion of that amount.
In this case, your investment relies entirely on movement of one single stock, and as markets are volatile, your money is at risk.

Thus, you should limit your losses by making your portfolio more versatile and therefore, relying on movement of several stocks rather than just one (as you make your house relying on several pillars to avoid a big crash). This process in finance is called risk diversification.

In our case, buying several stocks is too complicated because we cannot afford to buy them all.
Does it sound familiar to you? Or maybe you have enough money but want to
diversify your portfolio efficiently? Say thanks to financial engineers who thought about you and created Exchange Traded Funds (ETFs).  Here is the structure of ETF.

Exchange Traded Funds is a recent financial instrument, born in the 2000’s. It is a share whose value is directly linked to a basket of financial instruments. An ETF can replicate the performance of a commodity, index, stocks, bonds, well you get the idea. The performance is reported on day-to-day basis and is expressed with a price of the ETF share. On a Bloomberg Terminal, an ETF page
or a “classic” Equity page are very similar in terms of information provided.
It facilitates the Exchange Traded Funds  analysis for retail investors.

There are thousands of different ETFs available on the market right now. In fact, it has become
“Must have” or at least “Must know” amongst investors. There are several types of ETFs: Physical ETF, synthetic ETF, leveraged ETF, opposite ETF, opposite leveraged ETF.  Exchange Traded Funds are great investment tool for investors with different risk approach. If you would like to know more about different types of ETFs feel free to comment below.

Now, let’s get back to our example. With a limited amount of capital, instead of investing in two stocks of tech companies, why not to buy shares in ETF which mimics whole Technology Index and therefore provides good risk diversification with low transaction costs? Sounds easy right?

Even with a bigger amount of capital, Exchange Traded Funds  still act as a very interesting investment tool because the more of your capital invested in ETFs, the greater diversification of your portfolio becomes and thus, makes it more secure. 

ETF Data Base is the website to find your perfect Exchange Traded Fund. The one which corresponds to your investment criteria and in the sector of your choice.
It provides every bit of information you might need to make your decision.

On Bloomberg Terminal, you can access ETF menu or by writing “ETF” in the tool bar.

I personally used several oil ETFs (GUSH, UWTI) before the OPEC announcement of production cut.
In 10 days, with an original investment of £1500, it went up by 40%. I exit from this trade right after the barrier of 40% gain because the share price started to decrease and my technical analysis sent me clear indicators to sell.

​Another example of my successful trading experience using Exchange trading Funds was
Investing in SOXL leveraged ETF which tracks the performance of the
Philadelphia Stock Exchange, the Semiconductor Sector Index (SOX). According to my analysis it was one of the top performing sectors in 2016. My gross return over 1 month was around 4% which I think is not bad compared to the rest of stocks within the same time frame.

​Here are some of the biggest ETFs used today:

SPY - SPDR S&P 500 ETF, Tracks S&P 500 index

ISF - iShares Core FTSE 100 Dist, Tracks FTSE 100 index 

VTI - Vanguard Total Stock Market ETF, Tracks CRSP Total Market Index 

IUAA -iShares US Aggregate Bond UCITS ETF, Tracks Barclays US Aggregate Bonds Index    

IWF - iShares Russell 1000 Growth ETF, Tracks Russell 1000 Growth Index   

Summary:

​Thank you for your time.
​We would be very grateful for your feedback and feel free to ask any questions.
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Written by Samuel Chaineau │with contribution of Vee Venski

Edited by Vee Venski