ETFs show no signs of slowing down

Exchange-traded funds (ETFs) continue to storm the market and consolidate their position as the preferred choice of many investors.

ETFs are on a meteoric rise. They are on the verge of dethroning traditional funds as the most popular passive investment vehicle and, at the end of July, global investment in these instruments reached $705 billion, very close to the $736 billion they accumulated during all of 2020, according to Morningstar.

A good asset to tackle risk aversion

ETFs are hybrid investment instruments between funds and stocks, and are traded on the stock markets. They are defined by investing in a basket of assets (stocks, currencies, bonds, etc.) and because they usually replicate stock market indexes, such as the FTSE 100 or the S&P 500. “Being composed of multiple securities, ETFs offer great diversification and are considered a lower risk investment compared to investing in a single stock,” explains Ramiro Martínez-Pardo, CEO of HeyTrade.

To understand the appeal of exchange-traded funds, it is interesting to revisit their beginnings. The first ETFs were launched in 1993, but did not start to become popular until the 2008 recession. After the collapse of Lehman Brothers, many savers were wary of active investment strategies, with high fees and often lower returns than the low-cost index funds created by Vanguard in the 1970s. In the decade after the stock market crash, investment management firms such as Blackrock and Vanguard began launching their own ETFs, and many people decided to go for this passive investment alternative.

Being composed of multiple securities, ETFs offer great diversification and are considered a lower risk investment compared to investing in a single stock.

Transparency is a cornerstone value

Along with diversification, transparency is one of their great appeals and one of the keys to their current popularity. Socially responsible investment is a growing trend and a practice that must be accompanied by constant communication about the investment strategy. Unlike traditional funds, most ETFs publish their holdings every day, allowing investors to know what assets they are backing with their money.

Along these lines, investment management firms are increasing their offering of thematic ETFs, i.e. funds that invest in a basket of securities related to a particular field, such as renewable energy or biotechnology. This option has seduced many risk-averse savers interested in aligning their stocks with their investment decisions.

Easy to buy and sell

“Another point that explains the popularity of ETFs is that they do not require a minimum investment and can be bought and sold easily,” says Martínez-Pardo. Unlike mutual funds, which can only be traded when the markets close, ETFs can be bought as an individual stock. “The equity rally, near-zero interest rates and increased liquidity are other factors that have made ETFs a real and affordable alternative to traditional mutual funds,” adds HeyTrade’s CEO.

The figures speak for themselves: in the first half of 2021, ETFs attracted record investment, with a net capital inflow of some $661 billion, more than double that of the same period last year, according to data from the ETFGI consultancy. Likewise, and as we mentioned at the beginning of the article, Morningstar points out that assets under management by index-based ETFs reached $8.66 trillion at the end of June, only $132 billion behind passive mutual funds.

If you want to incorporate ETFs into your investment portfolio, with HeyTrade, you can easily invest in more than 1,000 stocks and ETFs across European, Asian and North American markets.