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They were created to measure what was happening in the stock market. When you hear on the news about share prices rising 1% the previous day, it does not necessarily mean that every single stock from Google and Facebook to General Electric rose the same percentage. In reality, it was the change in the value of the index tied to a specific market. An equity index can be thought of as a basket composed of a number of different stocks. Each day share prices change and, because of that, the value of the entire basket of stocks changes. While the prices of some stocks go up and others go down, these movements can always be expressed simplistically as a change in the value of the entire basket, the stock index in other words.

Although the two terms are often used synonymously in common discourse, they are hardly the same. A number of index funds that replicate selected stock market indicators cannot be traded on an exchange. For example, the world’s first index fund was created in the mid-1970s with the intention of replicating the S&P 500. This was almost 20 years before the first ETF came along. Besides, a number of ETFs can be found among the thousands that exist today that follow no stock index. They have their own managers and analysts who dynamically adjust their composition.

The S&P 500 Depositary Receipts, or spiders, were the first ever ETF, launched in January 1993. As the name implies, this ETF was supposed to replicate the popular stock index. But ETFs had to wait another 15 years for their star to rise. The financial crisis that peaked in 2008 and 2009 showed even highly intelligent and well paid mutual fund managers incapable of protecting their clients’ investments against high losses. In addition, every year brings new data showing few investment managers able to regularly outperform a stock index over the long term.

While a simple question, there is no clear answer. The answer would be positive if it could be narrowed down to just a mix of dynamic and conservative investments in stock and bond ETFs. It is possible among the range of ETFs currently available on the market, which PARTNERS INVESTMENTS can offer, to find an optimal mix for any investment profile. But such thinking ignores a number of other important factors such as the years of building up savings in mutual funds. Young people who started saving in mutual funds just a few years ago are in a different position than somebody that has been investing for 15 to 20 years and will be retiring in the near future. This is another reason why it would be ideal to seek a specific answer from a finance professional.

About 70% of all ETFs are invested in equity markets around the world. Just choose where in the world you wish to invest and whether you are choosing just a particular sector, such as technologies, or prefer shares in larger companies. Investors can also reach out to bond ETFs, which offer the same variety as equities. However, speculators may lean closer to commodity ETFs, which (like equities) may track a selected index or even a single commodity, in an extreme case. A separate group, albeit a minority, might even look into exotic ETFs. Or at least adventurous ones thinking about Chinese stocks in those sectors of the economy where government investment has been flowing in the current five-year plan. There are also ETFs seeking to profit from obesity and are investing in the stock of companies helping to cure it or are making clothes in non-flattering sizes.

ETF stands for exchange-traded funds, a type of pooled investment security that operates much like a mutual fund. Each ETF is essentially a fund whose shares are traded on an exchange. They provide investors with comparable advantages to classical mutual funds. Investments in ETFs are diversified and can always be sold or bought. But unlike traditional funds, whose prices per share are calculated once a day, ETF prices change throughout the day. There is also a fundamental difference in the fees that are charged, where ETFs have fees an order of magnitude lower than mutual funds.

In the case of mutual funds in Slovakia, managers select the specific investments, guided by the fund’s own rules that define the investment strategy. The managers have to decide the stocks to select for their portfolios and when to buy or sell them. These type decisions are why mutual funds are often referred to as actively managed funds. ETFs that replicate a selected index are invested only in those stocks the index covers. A largely automated process that dispenses with expensive analyses, investing in them is considerably less expensive than in mutual funds. In addition, Slovak legislation gives ETFs an advantage. Anybody that invests in an ETF for at least a year pays no taxes on the profits earned from it. Mutual funds do not enjoy such an exemption.

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