One of the recent surveys conducted by CNBC has shown that ETFs are in the third place among ten most popular investment solutions. ETFs combine the funds of investors to buy a variety of assets, including stocks, bonds, and commodities. They are traded on the stock market and investors can buy or sell shares of exchange-traded funds (ETFs) at market prices, throughout the operating hours of the stock market.
ETFs have become favored among investors looking for economical and diversified investment choices. What’s more, people find ETFs appealing due to their flexible trading options and ability to access diverse market sectors. Both individual and institutional investors are drawn to ETFs as they seek to create diverse investment portfolios.
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How ETF Works
Once an ETF pooled the money from the investors it can start operating and following the strategy that is managed by the fund’s operators.
When you buy a share of an ETF, you are buying a small part of the entire ETF, not the specific stocks or assets that the fund holds. For example, if you own a share of an ETF that includes Meta (Facebook) stock, you own a piece of the ETF, but you don’t directly own any of Meta. This means you can’t vote on company matters like shareholders can, but the person who manages the ETF may have that ability to do so.
The same idea with dividends. If the company inside the ETF pays dividends, then the manager of that ETF divides them between investors of that fund.
Here is a step description of what’s happening behind the ETF:
1. When creating an ETF, the provider picks a group of assets like stocks, bonds, currencies or other securities and unites them all under one ticker.
2. Investors can easily put their money into one of the ETFs and purchase a share of that basket, like they usually do to shares of a company.
3. Bulls and bears (buyers and sellers) trade the shares of ETFs like usual assets on the stock market.
How ETFs Make Money
The obvious way for investors to earn money using ETFs is to trade them on the stock market. What’s more, certain ETFs provide payments to investors from the profits they earn, known as distributions. There are few types of distributions:
- You might receive interest distributions if the ETF invests in bonds
- Dividend distributions if ETF invests in dividend-paying stocks
- Capital gains distributions if the ETF sells an investment for a profit.
Instead of automatically reinvesting your cash distributions into more units or shares like Mutual Funds, with ETFs your money can be accumulated on your account or the managers of ETFs will let you know other options they can provide.
Types of ETFs
There are five major types of ETFs:
Equity ETF: track stock indices like S&P 500, Russell 2000, and Dow Jones. They’re grouped by market size, style, strategy, sector and region. Example is the iShares Core S&P 500 ETF (IVV).
Fixed Income ETF: to track an index of bonds which can be categorized by average duration, issuer type, credit quality, yield, or region. Example is Vanguard Total Bond Market ETF (BND).
Commodity ETF: to track single or multiple commodities like oil, gold, or agricultural goods. They’re categorized by strategy: physically backed, futures-based, equity-based, or ETNs. Example is Invesco DB Commodity Index Tracking Fund (DBC).
Currency ETF: to invest in various countries’ currencies for profit based on their price movements relative to other currencies. Funds can use tools like futures and options in order to gain profit in that type of funds. Example is WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU).
Real Estate ETF: to pool investors’ money to buy a mix of real estate assets like properties, real estate investment trusts (REITs), or real estate-related stocks. They strive to mirror the performance of a particular real estate index or sector. Example is the JPMorgan BetaBuilders MSCI U.S. REIT ETF (BBRE).
What is a Bitcoin Spot ETF?
BlackRock and other asset managers, came up with the idea of setting up the Spot Bitcoin ETF — an investment product that tracks the price of BTC by holding Bitcoin. The spot Bitcoin ETF aims to follow the current value of Bitcoin directly by investing in Bitcoin itself.
Why the Emergence of Bitcoin ETFs is Important for the Crypto Market
Investing in a Spot Bitcoin ETF investment rather than directly buying Bitcoin may provide various advantages:
- Investing in a Bitcoin ETF is similar to trading stocks or bonds through regular brokerage accounts, making it easily accessible for those familiar with stock market investing. This may stimulate an asset to increase the liquidity.
- ETFs must comply with SEC regulations, ensuring security, oversight, transparency, and adherence to reporting and regulatory standards.
- Simplifying processes of owning the Bitcoin would reduce the risks of losing an access (key) to an actual asset.
Spot Bitcoin ETFs could stabilize Bitcoin adoption by improving market liquidity, refining price discovery, and attracting institutional investors. However, the resulting surge in demand and speculative trading might raise worries about potentially overvaluing the currency.
