How can ETF shield your portfolio from inflation? What are ETF and how they work? Lets discuss all these questions and many more so that we can construct our own portfolio which give us high returns and moreover shield our investments from ill effects of inflation.
What is ETF and how does it work?
ETF or the Exchange Traded Funds are the portfolio of stocks or bonds or other type of investments which are traded on the stock exchange very much like other stocks. These are the low cost, open ended, transparent securities which you can trade continuously on the stock exchanges. The net asset value of these securities is calculated daily. ETFs are considered safe investment securities. They not only make your portfolio inflation proof but also provide you with the liquidity.
These securities are less volatile than the stocks traded on the stock exchanges. Most of the ETF traded today are the index funds which mean that these securities track the performance of the popular stock or bond indices. Due to this they give you a higher return as compared to the bonds and other government securities. This thus helps you to improve the overall return of your investment portfolio.
They are traded on the stock. Thus the next big question that pops up is can you as an investor stand to loose your money? Well, the answer is that if the market falls and if the index which your ETF follows also falls then you will loose your money but the chances for this are negligible because there are fund managers who are working continuously on this, they monitor every rise and fall of the markets and they are there to move your money to a safer option. This professional management of your investments is what adds to the benefit of investing in ETF.
Moreover, the authorized participant fees are modest enough and if one results in the deviation of the prices another can step in and earn the profit on the difference. All this keep the net asset value of the securities well under control.
Unlike index tracker ETF are not subject to the stamp duty and stamp duty reservation act. Also you don't have to pay for the dealing costs. Moreover these securities are covered by the FSA compensation schemes; they provide the investors with the intra day dealing and the range of exposure which these securities bring are very large as compared to the index trackers.
These are some of the features and benefits of trading in ETF. But how they help you to guard your portfolio against inflation? The answer to this lies in the benefits which ETF provides you. These securities give the investors the transparency. The fund manager clearly states composition of ETF and the fees associated. They are open ended securities and provide you with the exit option whenever you fear a loss. Moreover as they are index traded they earn you a high return.
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