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ETFs: what they are, how they work, how to use them

It is very difficult for a professional manager to achieve a higher return than the market. By "market" we mean the reference index of the country where the manager operates: in the case of Spain, the IBEX 35; in the case of the US, the Nasdaq 100 or the S&P 500.

That is why, years ago, products were created that replicated the gains or losses of indices: ETFs. If, for example, the IBEX 35 gains 0.5%, the IBEX 35 ETF would also gain 0.5%. The commissions are also very low: probably, if they are not the lowest of all financial products, they should not be missing much.

ETFs are financial products that are easy to understand: if, for example, in the IBEX 35 15% of the "peso" corresponds to Iberdrola, 12% to Inditex and 10% to Banco de Santander, 15% of the money invested in the ETF will be invested in Iberdrola, 12% to Inditex and 10% to Banco de Santander. And so on.

Another advantage of ETFs is their low price. You can invest in an ETF that replicates the IBEX for about 10 euros. An Inditex share, today, is around 35 euros. And, finally, since it is usually made up of shares, which pay out dividends, ETFs either reinvest those dividends -which increases the value of the ETF- or distribute them among cash investors.

To summarize: the gains or losses of an ETF are easy to calculate - simply taking a look at the reference index tells us the evolution of the price of our ETF - and the commissions are usually very low. If they are made up of shares or financial products that pay dividends or the like, either we have an increase in the value of the ETF or we get a cash refund.

ETFs have become so popular that they are used not just for investing in stock indices: just about any commodity imaginable is included in an ETF of one kind or another. We can also invest in a certain geographical area or in a certain sector: if we believe that, for example, the banking sector is going to have good results, we can invest in an ETF of the banking sector. ETFs are one of the main investment vehicles used today.

It was, therefore, a matter of time before some type of ETF was created that would allow investing in crypto assets. The first ones will be destined to replicate Bitcoin. Today, Bitcoin is around $30,000 a unit; the ETF will allow you to invest in Bitcoin at a very low price -nothing to do with its price-. Access will be very simple -through the very popular online investment platforms that most banks offer today-. And the cost in commissions should be very low, since ETFs do not require permanent supervision, a lot of means or personnel. They will therefore represent an ideal vehicle for all those who want to invest in bitcoin and until now have not been able to do so. With all the guarantees that we can imagine, since these ETFs will buy bitcoin to support your investment.

There is also one more point to discuss about the creation of an ETF on bitcoin. Perhaps the most important. The inclusion of bitcoin in the world of ETFs implies that cryptocurrencies -specifically bitcoin- have achieved, in the eyes of the big players in the world of markets, a tremendous boost. Nobody creates an ETF if they believe that it will not last over time; The creation of a bitcoin ETF - in fact, several will be created - implies that major financial companies believe that bitcoin is not a fad or a passing product. And any sensible investor should take this into account.

The H&B team.


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