What is an ETF?

An ETF is priced in real time

The primary difference between an ETF and a traditional fund is that an ETF is traded and priced in real time on the stock exchange. As the price of the underlying assets of the ETF changes during the day, the price of the ETF will change. When you place your order during the day, the trade will be completed at the price prevailing at the moment when the order is executed.

As with trading in equities, a buy and sell order for an ETF can be limited, as well as it is possible to use stop-loss orders. An ETF can also be sold short and lent. 

Traditional funds are priced just once a day

Most traditional funds are only priced once a day. In this case, it does not matter when an order is placed, because the price is the same for everyone. With an ETF, you decide when you want to trade during the day, and you pay the price prevailing at the moment that your order is executed.

Quotations for Xact ETFs are displayed here. 

An ETF has a low management fee. One reason is that most ETFs are index funds for which the manager does not have to take active investment decisions. Instead, the fund invests in the assets and in the proportion, included in the benchmark index. Consequently ETFs can be managed at a lower cost than traditional actively managed funds.

Investors bear its own cost

In a traditional fund, unit-holders’ deposits and withdrawals are made directly with the fund. As a result, the manager must buy and sell securities to equal the deposits to and withdrawals from the fund, thereby incurring expenses in the form of brokerage fees and other transaction costs. Furthermore, in an actively managed fund the manager buys and sells securities to increase returns for unit-holders, which also entails expenses for the fund. All of the fund’s expenses affect all unit-holders equally through a corresponding decline in the return of the fund, which is a disadvantage for long-term investors.

In an ETF, outstanding units are traded on the stock market, not directly with the fund. The cost for you as an investor to trade an ETF is the commission you pay to your broker and the spread.

For trading and prices on the stock exchange to work, Xact has agreements with various market makers who can create and redeem fund units directly with the fund. As payment for new fund units, the fund receives the underlying basket of securities that make up the fund´s benchmark index, i.e the fund does not have to purchase the securities in the market. Consequently an ETF usually has extremely low transaction costs. So, even if many investors buy and sell fund units on the stock exchange, you will not be affected as a unit-holder. Everyone covers their own costs in an ETF, through the commission paid to the broker. 

An ETF can be used as a long-term strategic investment as well as for tactical adjustments in the portfolio to achieve a temporary exposure. 

The clear and transparent investment strategy demonstrated by an ETF, combined with the low costs associated with trading, make ETFs excellent building blocks for creating various investment portfolio strategies.