ETF Definition – Gold ETF , Silver ETF, Bitcoin ETF, etc…
An “ETF” is short for exchange traded fund, it is a fund that invests in assets, and it’s shares are traded on a public stock exchange, just like stocks are.
These funds usually hold commodities, stocks, bonds, or can be a basket of stocks, securities or any of the above. It can also be a basket of stocks in a specific industry or category.
The ETF is traded for an amount close to the value of the original asset, during a trading day. Which means a Gold ETF will trade for a price very similar to the price of gold.
ETF shareholders get a part of the profits, like dividends paid and interest earned. In case of fund liquidation, shareholders get a residual value.
ETF creation and supply is regulated through “creation” and “redemption” processes that involve banks and huge investment firms referred to as authorised participants (APs).
Gold ETF: As explained above, ETF are securities created by banks and big investment firms. Thus there are many Gold ETFs, hundreds maybe even thousands. An example from wikipedia: SPDR Gold Shares, a gold ETF, has each share represent ownership of one-tenth of an ounce of gold.
Silver ETF: Like gold ETFs, silver ETFs also represent different kind of ownerships of silver. And the silver ETFs are also numerous.
Bitcoin ETF: Unlike most ETFs, bitcoin and crypto ETFs are not usually created by banks, but rather crypto focused funds. A bitcoin ETF or any digital currency ETF, mimics the price of the coin, allowing investors to buy into the ETF without trading bitcoin or the crypto itself. It also allows investors to avoid issues with the complexity and security related to trading cryptocurrencies.
Advantages and Disadvantages of ETFs:
1- Investors can sell short or buy on margin.
2- ETFs can make some commodities easily traded by many, instead of limiting the trade to the few involved in the industry.
3- ETFs can provide diversification easily. An index fund is a financial instrument that provides exceptionally huge diversity at low cost
4- ETFs can inflate prices of certain commodities. Because investors by investing in an ETF might influence the price of original commodity. I did a 30 seconds search and found ETFs for sugar, wheat, oat, etc …
5- ETFs is not ownership. A bitcoin ETF ownership does not mean you own bitcoin, the fund might or might not own it though.
6- ETFs can be liquidated for various reasons. And are often not safer than stocks.