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What are ETFs?

ETFs are investment asssets that are similar to mutual funds, but have some important advantages over them. They are collective investment vehicles that offer the possibility of diversified participation in particular market sectors. They can invest their assets in stocks, bonds, commodities, real estate, etc. Investors buy shares of the ETF and this represents a proportional participation in the ETF's basket of assets, just like in a mutual fund.

Unlike a mutual fund, ETFs are traded on stock exchanges during normal market hours and are bought and sold like any other type of stock, and are subject to the same brokerage fees as common stocks. Due to this and other tax advantages, the management and transaction costs of an ETF compared to a mutual fund with similar exposure are much lower.

What are the risks of ETFs?

ETFs are investment instruments that carry various risks. The most important are:

  • Market risk

As with mutual funds, the prices of the assets that are represented by the ETF fluctuate according to market conditions and therefore ETFs can also gain and lose value.

  • Mismatch risk

Since ETFs must replicate the value of the assets they represent at all times, it may happen that some of them temporarily stop trading (due to market closures, technological failures, illiquidity, etc.). Should these circumstances occur, the market price of the ETF may deviate from the value of the assets it represents, which implies that a buyer/seller operating at that time could pay/receive an incorrect price.

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