ETF

How to Invest in ETFs: A Beginner’s Guide. Which ones should you buy?

Investing in ETFs can be a good way to get into the stock market if you are a novice investor. It’s a low-cost tool that exposes you to less risk than investing in individual stocks because the passive fund already contains diversification within it.

In this buying guide on ETFs for beginners, we’ll look at the advantages, disadvantages of index funds and how to buy ETFs today. Rarely does a bank offer you an exchange-traded fund investment (why?), so we’ll show you some online platforms where you can buy ETFs or trade CFDs.

ETFs: What are they?

What are ETFs? The name comes from the acronym Exchange Traded Funds, which are funds traded on an exchange just like stocks and bonds.

ETFs are also called passive funds, because unlike mutual funds they move automatically by replicating an underlying asset:

• a stock index;
• a bond index;
• a basket of commodities.

This makes them cheaper, because managers do not have to invest resources for periodic monitoring. But also diversified, because they perform by following an index or a set of instruments.

ETFs made their first appearance in the USA at the beginning of the 1990s. In Italy they were introduced only a decade later, in September 2002, but they have made a great impression. In fact, a recent statistic revealed that the most active European market in terms of ETFs is the Italian Stock Exchange.

In recent years, interest in ETFs has grown considerably, not only among retail traders (i.e. small investors, who put little capital into them), but also among institutional investors, such as banks, hedge funds, etc.

Investing in ETFs: What advantages?

If ETFs have been so successful in a short time, the reason is in the great advantages they have offered compared to traditional managed funds. Let’s see what the main ones are.

Simple instrument

This is due to the fact that ETFs replicate the performance of a benchmark index to which they refer. This gives investors direct exposure to the market they are most interested in.

Be it stocks, bonds, commodities and so on. But also by pursuing their preferred strategy: short or leveraged.

Ease of Management

They can be managed in real time on the Stock Exchange, as well as bought and sold through intermediaries such as brokers or banks.

Generally, in terms of costs, it is more convenient to do it through the former, since banks provide for higher commissions since they provide for the management tout court.

They enjoy high transparency

In view of the fact that they replicate a well-known market index, they ensure that investors know what risks and profits they are facing in a transparent and preventive manner.

Furthermore, the price is constantly updated according to the development of the benchmark (or index) to which it refers. Therefore, the trader is constantly updated on its trend over time. In fact, the Exchange publishes the official value of the ETF (NAV) on a daily basis.

They offer flexibility

ETFs do not have an expiry date and are listed on the stock exchange in real time. Thus, the trader has the option of modulating his objectives within a specific and controlled time frame. It goes for example from a short time frame, even of hours (the so-called intraday trading) to the medium/long range (think, for example, of investments for pension purposes).

Flexibility also derives from the fact that it is possible to invest even on a single unit in terms of a share or stock. Therefore, it is possible to invest small amounts on several markets around the world.

Economic instrument

This is a passively managed instrument and this makes it possible to lower the costs that are typical of active management, as well as distribution. This results in very low fees.

Reduced risk

Investing in ETFs means buying an assorted package of instruments in one fell swoop. This satisfies the good rule of diversification, which advises not to concentrate too much capital on a single asset, but on several financial products to dilute the risk.

How do ETFs work?

ETFs function as passively managed instruments. This means that they replicate the performance of a certain index (also called a benchmark in Anglo-Saxon jargon) or the price of a basket of assets.

Equity indices are instruments that include the shares of the best companies in a given sector or that have a certain performance. And they are also very important for analysts, to determine the performance of the world’s stock exchanges or, indeed, the state of the art of a given sector.

An ETF can also be based on commodities. There are oil ETFs such as the United States Oil Fund, one of the most sought after, but also gold, palladium and so on.

The managers of an ETF buy shares of securities of the reference indices in a way that is proportional to the resources available. In this way they manage to obtain an investment value equal to that of the replicated index.

In actively managed funds, the manager has broad discretion in the choice of securities in order to achieve a final profit. In the case of ETFs, however, it is known in advance which products to buy, because they correspond to those included in the index.

What does this mean? That the final result of the investment in an ETF does not depend so much on the ability of the manager to choose the various assets, but on the performance of the index on which he has decided to bet.

How to choose an ETF

How do you choose an etf to invest in? The aspects to evaluate are not only the underlying assets or indices. Here are the main factors to consider when investing in etf:

1. amount of assets managed by the fund, which weighs on its liquidity
2. the type of strategy it replicates: physical or synthetic. Although experts advise to bet on the first one
3. the expected commissions
4. the reference currency
5. who manages the fund
6. expected premium/discount

Investing in ETFs: Expected commissions

What are the expected commissions on investments in ETFs? What are the costs?

We said that one of the main advantages of this passively managed financial instruments are precisely the low commissions.

This is due to their basic structure, with managers able to optimize the phases of purchase or sale reducing the general costs related to management.

Commissions on ETFs are estimated to range from 0.09% to 1.5%.

Investing in ETFs in 2022: Which sectors to focus on?

2020 was an inauspicious year for financial markets, complicit with Covid-19. Not for everyone, of course. There are also equities that have literally skyrocketed, such as Amazon (due to the surge in e-commerce), the shares of Zoom (a platform used in different areas, from school to work) or multinational pharmaceutical companies that are working on vaccines.

With regard to etf, we cannot give you the winning horse with any certainty. Also because, whoever talks about certain forecasts, just wants to cheat you.

But, at most, we can suggest which are the sectors that, according to several analysts, could give more satisfaction in 2022. How:

• Funds that include companies that deal with AI, artificial intelligence. A sector that is expanding considerably and will be for years.
• Asian markets, whose growth is steady and only slowed by Covid-19, closing the year anyway with a positive sign.
• The ETFs that refer to oil, which, after a rather suffered year, should rise considerably.
• ETFs that include pharmaceutical companies. Which, pardon the pun, always enjoy good health. Especially those that are carrying out the vaccine race.

Which ETFs to buy in 2022?

Having reached this point, it is possible to expose some of the largest ETFs available in the market today. The year 2021 was a rather unique year, which saw the development (as well as the decline) of several different sectors.

Commodity ETFs

Commodity ETFs are a first major category of Exchange Traded Funds, widely considered by experts and analysts.

Commodities represent a unique basket of their kind, centered around the presence of numerous historical assets, such as gold. They have specific influencing factors that are different from other financial instruments, related to natural events, mining or harvesting processes and much more.

What are the main ETFs on commodities? Following are some of the most important ones:

• Oil ETFs
• Gas ETFs
• Exchange Traded Funds related to edible assets, such as ETFs on

Technology ETFs

One relevant sector that has shown unparalleled development over the past few years has been technology and innovation.

Within this large macro-area, it is possible to recall a series of interconnected sectors, such as automation, the development of artificial intelligence, digitalization processes, advanced robotics, up to network security.

Many companies, born during the last few years, have been able to be listed on the Stock Exchange just during this 2021. Their presence, has allowed in a parallel way to the sector of ETFs of robotics and AI to be able to enrich itself with new funds.

What are the main ETFs available in this niche market? Here are a few names:

• ARK Next Generation Internet ETF
• First Trust Nasdaq Artificial Intelligence and Robotics
• First Trust Cloud Computing
• ROBO Global Robotics & Automation ETF
• Global X Robotics & Artificial Intelligence ETF
• Global X Cloud Computing ETF
• Defiance Next Gen Connectivity ETF

Equity ETFs

Nowadays, we hear a lot about equity ETFs. Specifically, these are simply funds linked to existing indices containing some of the world’s major equities.

These in turn can refer to a single country, a single sector, taking into account numerous parameters. Typically, most equity ETFs are represented by funds containing large-cap stocks.

What are the main equity ETFs? A few names follow:

• Amundi S&P 500 Buyback UCITS Strategy and Current Share
• iShares FTSE Italy Mid-Small Cap UCITS ETF
• iShares MSCI Emerging Markets ETF

Cannabis ETFs

Last but not least, let’s look at some Exchange Traded Funds that are directly linked to the hemp market.

It is a product widely used in the medical sector and nowadays also recreational (only in case of permitted levels of active ingredient, i.e. THC). Contrary to a few years ago, the production and legalization of cannabis has seen the inclusion of new players also in the EU.

The main market leader, in any case, remains Canada, one of the first territories to have believed in this sector and to have legalized the same raw material. The presence of many hemp production and processing companies has allowed the birth of some ETFs.

Where to invest in ETFs?

Now that you understand what ETFs are and how they work, you’ll also want to know where you can invest.

We also have an answer to that: the best way is to trade online through brokers with a regular license to operate. And that enjoy Consob clearance to do so in the UK or in the USA.

The brokers we suggest offer CFD trading. This means that you don’t buy/sell the underlying asset directly, but they are more suited to intraday trading.

The advantage is that they are convenient brokers, having commissions and spreads below the market average. As well as platforms that offer many services that will help you in your hunt for profit.

eToro

Not all of them though: some platforms also allow you to buy some underlying ETFs, which are suitable for those who plan to invest in passive funds in the long run. One such broker is eToro, with three licenses under its belt:

• CySEC (issued in Cyprus)
• FCA (issued in Great Britain)
• ASIC (issued in Australia)

The minimum deposit with eToro starts at 200 euros, but you can also start with a demo account. Among the most interesting services of eToro is the copy trading, through which you can copy the winning traders (called Popular trader) who invest in Etf.

XTB

The alternative to eToro for ETFs is the XTB platform. This broker offers a good opportunity to invest in international companies, commodities, real estate and bonds in the most cost-efficient way.

There are over 200 ETFs available on XTB and commissions charged start at just 0.08%.

The efficiency of the xStation5 platform is second to none, and there is a version for smartphones and tablets called xStation Mobile. In terms of certifications, XTB is authorized to operate in Europe by CySEC and in the UK by the FCA.

If you need more reasons to trust XTB we can say that Jose Mourinho has put his face on it, sponsoring the broker and that on the platform you can invest in over 5,400 assets and you can learn the trade thanks to the Trading Academy with courses for beginners and experts.

How to invest in ETFs

In the previous paragraph we mentioned that today there are specific intermediaries and professional operators, which allow to operate directly on ETFs, or through derivatives.

In this regard, in practice, investing in ETFs represents a completely revolutionized activity compared to the past. The same platforms made available by brokers have in fact facilitated access to financial products.

In fact, today it is sufficient to possess

• A regularly opened account within an authorized broker (the presence of licenses represents an aspect to always take into consideration before making any registration);
• A computer, or alternatively a mobile device if the broker allows to operate also through an application;
• A stable Internet connection.

Is it worth investing in ETFs?

Another question you are surely asking yourself: is it really worth investing in ETFs? Tendentially yes, especially in relation to the fact that they are quite simple to manage and control, as well as boasting low commissions.

It is no coincidence that, as mentioned, they are increasingly chosen by both retail traders and large investors. Obviously, not everyone believes in the goodness of this investment tool.

Some experts, for example, believe that passive strategies, while being in an advantageous position when the market is in a positive phase, are actually the ones that suffer the worst damage when things get worse.

Furthermore, there are those who oppose ETFs because they believe that their diffusion causes instability in financial markets. Leading to a reduction in what may be the merits of the fundamentals. It is as if they somehow drug the market or adulterate the actual results.

Investing in ETFs: Risks

Just like any other financial instrument, investing in ETFs also involves the presence of specific risks. In this case, it is good to specify several aspects, which should always be kept in mind by an investor.

The types of risks associated with ETFs fall into different categories. On the one hand, there are the risks associated with the composition of the ETFs themselves, and on the other, the risks associated with the fund structure, i.e. the technical functioning of the fund. In the course of the following paragraph we will go into this second relevant aspect in greater detail.

As regards the risks linked to the composition, we know that an ETF essentially contains and replicates a basket of several financial instruments (such as equities). Hence the parallel presence of risk, linked in turn to the volatility of the assets.

In any speculative activity that takes into consideration volatile instruments, investors must always bear in mind the unpredictability of fluctuations (upwards and downwards), which can vary (positively or negatively) the collective trend of the basket.

How safe is it to invest in ETFs?

A second relevant aspect, which we have anticipated in the previous paragraph, concerns the presence of possible risks associated with the structure of an ETF (Exchange Traded Funds).

In this regard, can an ETF fail? Does a default risk concretely exist on a specific ETF, regardless of its internal composition and replication of financial instruments (even on the underlying of the same)?

These are just some of the many questions asked by users who decide to approach these financial products. It is possible to consider how the structure itself of an ETF is already very diversified. It can in fact be seen as a multi-asset portfolio, created in a manual way.

As regards the concrete risk of default, linked in turn to a failure of the ETF, it is possible to remember that in a fixed replication ETF, the assets linked to the product (with reference to the management company “SGR”) represent a separate item with respect to the issuing company.

Also for the so-called synthetic ETFs, different from the first category of fixed ETFs where the manager physically owns the assets of composition of the index, there are specific rules to which the so-called counterparty of the derivative must necessarily comply.

Specific laws foresee how the same ETF cannot be composed of more than a certain percentage (usually 10%) of assets in derivative products of a single issuer.

How much does it cost to buy an ETF?

One of the most frequent researches carried out online on ETFs, concerns the presence of eventual costs and commissions.

In this regard, it is good to keep in mind that within a standard ETF, taken in its entirety, it is possible to highlight a series of variable costs, which may differ based on the fund itself and many other parameters.

One of the first costs is represented by the commission for the current financial year, which is usually deducted from the recorded performance of the ETF itself. In this way, the investor will not have to comply with third party payments, seeing the costs deducted (also in this case variable in percentage).

It represents an indirect payment on the management and is usually included in a range from about 0.09% to about 0.80%. The direct costs, instead, are linked to the process of purchase, or better, of buying and selling, and are usually requested for each single execution.

A final cost, which can also in this case be defined as purely implicit and indirect within the operation, concerns the so-called Bid – Ask spread (i.e. the differential between the real value of purchase and that of sale).

ETFs and ETPs: Differences

You’ve probably also heard of ETPs and wondered what the difference between the two is. If only the final letter.

Obviously, you’re too smart to realize that’s not the case. Or that that’s just a semantic difference. In fact, we also jump at the chance to explain to you the difference between ETFs, ETNs, ETCs.

ETP is of course another acronym, standing for Exchange Traded Products. It refers to the entire family of listed index products. Thus:

• ETFs (Exchange Traded Funds) themselves
• ETNs (Exchange Traded Notes)
• ETCs (Exchange Traded Commodities).
• ETNs are debt securities that replicate a non-equity index. While the latter, ETCs, replicate an index referring to a commodity. Referring as much to “spot” prices as to futures.

ETFs are based on physical securities in whole or in part. Whereas ETNs and ETCs, are bank notes. Therefore, they are non-coupon bonds that boast a very long maturity. While the yield is pegged to the index.

This also means that ETNs/ETCs are subject to counterparty risk. Therefore, if the issuer unfortunately goes bankrupt, anyone who has decided to bet on an ETN/ETC is at serious risk of incurring a loss.

In order to mitigate this risk, many issuers “collateralise” them. What does this mean? In other words, they set aside an amount or a certain quantity of commodities in a separate and independent account as security for the capital invested.

How to invest in ETFs – Frequently Asked Questions

Which ETFs to buy now?

In the course of our complete guide we have had the opportunity to discover in detail some of the main 2021 ETFs, i.e. Exchange Traders Funds, many of which are available and listed within professional and regulated brokers.

When to buy an ETF?

There are numerous strategies related to choosing on a possible purchase of an ETF. Even the time of day (such as afternoon versus morning or evening) is an aspect associated with the value and variation of the so-called Bid – Ask spreads. In any case, the investor evaluates at his own discretion, based on his own studies.

How to choose an ETF?

Each investor has the possibility to choose the ETF that best suits his needs and requirements. Some of the main evaluation aspects, taken into consideration by the experts, are: level of risk, sector to which the specific fund belongs, composition and much more.