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What are ETFs and ETCs

What are ETFs and ETCs
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Perhaps working with so many abbreviations in exchanging can be a bit confusing, but the truth is that both instruments are so different that once we get to understand how they work it is unlikely that we will ever confuse them again. 

 

Both instruments are very useful for retail investors, and the best way to start is to decipher their names and then talk about their performance.

 

What do they mean with ETFs?

Exchange-traded funds, i.e. publicly traded mutual funds, a fund pools money from different unitholders for investment. 

 

The difference between an ETF and other types of mutual funds is that as an exchange-traded fund, we can buy and merchant units in it, easily and quickly. 

 

We do not need contracts or to pay subscription or redemption fees, we simply need an account with a broker to purchase shares. 

 

ETFs are also sometimes called index funds, because many ETFs replicate an index, for example, feed ETFs that replicate the Spanish Ibex 35, however, not all ETFs are index funds, ETFs are exchange-traded funds, some of them replicate indexes and some of them do not. 

 

Feed ETF funds have investment strategies other than indexing, but as most retail investors who use ETFs use them to invest in indexes, sometimes both words are used synonymously, although it is necessary to say that speaking specifically of them, they are not the same.

 

What can be done with ETCs?

And so forth stands for Exchange-exchanged products (exchange-traded commodities), as the name reveals something very important, and that is that they are not a list of funds, but rather exchange-traded investment vehicles, which allow investors to be exposed to commodities, either individually or on a sector basis. 

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In other words, ETCs allow us to invest in commodities such as oil, gold, or other precious metals and, because they are listed on the stock exchange, we can also purchase them easily.

 




Main differences between ETFs and ETCs

 

If we say you want to invest in gold and you start your search on ETFs only, you will realize that none of the results is an ETF, tasks or almost tasks ETCs, and you will wonder why this is because there is a regulation that determines the operation of investment funds. 

 

In the European Union, for example, these regulations are known as UCITS, for regulatory reasons an investment fund cannot invest more than a certain percentage in a single position. 

 

There is no ETF that invests in only one or two investments, an ETF generally invests in dozens of stocks or other financial instruments, which is why we do not roughage ETFs that invest in gold. 

 




The alternative then is to invest using an ETC, without a ban, we must take into account that an ETC is not an investment fund and that has different risks, an ETC is not an asset that is protected in case of insolvency of the issuer, that is, if the entity that issues the ETC goes bankrupt, in theory, our capital would not be protected.