Unit Linked Funds
Exchange traded funds – What are they?
An Exchange-traded fund (ETF) is a collection of securities, such as stocks, that track the underlying index. They differ from individual assets as they group together certain assets of the same class be it stocks, bonds, commodities or even a mixture of them all. They issue their own securities, which can be bought and sold on the stock exchange.
Basically, it is an asset class which mirrors some stock indexes: Dow Jones, MSCI, S&P 500, FTSE 100, NASDAQ. The most famous ETF is the SPDR S&P 500 (SPY).
The ETF market securities are equivalent to stocks that are part of the fund’s portfolio.
The ETF index changes in accordance with the underlying index: if FTSE 100 falls, the value of securities in ETF in that index also falls.
The market factors can influence ETF returns: increased demand forces stocks to grow in price, even if the underlying index stands still, and the increased supply on the market can drop the ETF in value.
Another source of profit for the ETF holder – the difference in exchange rates. Price can be set up in dollars, euros, pounds, but the ETF can be trading in different stock exchanges.
The yield of ETFs depends on:
- Quotes of basic indices.
- The level of supply and demand of the ETF.
- Exchange Rates.
There are more than a thousand stock funds that track a variety of indices: from the world known (S&P 500, DAX 30, Nikkei 225) to the highly specialised (luxury, vegan, alternative energy, products for Catholics, anti-obesity industries).
Using ETFs as part of a portfolio can allow investors to benefit from a wide range of asset choices and holdings!
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