Investing in stocks is not the only option for making money. There are other products that can complement stocks and even replace them. ETFs are one of the most popular products in recent years.
ETFs that have positioned themselves as an alternative to stocks for many investors seeking passive management.
So why are ETFs more recommendable than stocks?
What are ETFs?
The term ETF comes from the ‘Exchange Trade Fund’ That is, it is investment funds, but with certain characteristics different from the traditional investment funds that we know of.
The difference with traditional investment funds is that ETFs are quoted in a similar way as stocks are. The value of a traditional fund is calculated from one day to the next.
If you want to buy traditional funds you can do it at any time, but you will have the purchase made according to the value according to the market at the end of the day. This same applies should you want to liquidate or transfer to another fund.
The trade of ETFs is different from the traditional fund, and is more similar to that of the shares, but that is called quoted funds. The price of ETFs varies according to the real time, like a stock market, and you can buy and sell at any time of the day at the market price at any time.
What are the differences between ETFs and stocks?
If ETFs quote as stock, we can ask ourselves how they differ from the shares. The difference is that ETFs are investment funds and are made up of different baskets of stocks or replicas of the same baskets. That is, when buying a stock you are investing in a specific company, but through the ETFs you are investing in several companies at the same time.
ETFs, in fact, tend to replicate stock market indices, whole sectors, countries and even entire continents. There are ETFs that replicate the behavior of the global economy, such as the iShares ETFs.
What type of taxation applies to ETFs?
The taxation that applies to ETFS is different. In the case of ETFS, which are funds that are quoted as shares, we can ask ourselves what taxation should be applied to them, how should these investment funds be taxed …
ETFs usually pay taxes as a stock should. That is, as the benefit or loss of assets for which you have to pay each time you buy or sell the ETFs, without being able to apply the advantage of reinvestment exemption enjoyed by traditional investment funds.
What are the advantages of ETFs over shares?
The differences between ETFs and stocks also mark the advantages over investment in the stock market. These are the points that can be highlighted of ETFs:
- Greater diversification at a lower cost. That is, when investing in a basket of stocks, commodities or assets, ETFs are already a product that is diversified in itself.
- There are more investment alternatives. That is, ETFs allow investors to invest in assets that companies can not invest. A quoted fund may invest in fixed income or commodities …., that is, there are ETFs on gold, oil and other assets with similar characteristics.
- Most advantageous taxation for foreign ETFs. That is, foreign ETFs can enjoy tax deferral. Therefore, if you pass money from one ETF to another, you do not have to pay at that moment. There will be savings between 19 and 23 percent of the benefit that you would not have to pay upfront.
ETFs are versatile instruments that complement other investments and are one of the pillars of passive management and indexed portfolios.