Maybe working with so many abbreviations in trading, can be a little confusing, but the truth is that they are such different instruments that once we come to understand how they work it is unlikely that we will confuse them again.
Both instruments are very useful for individual investors, and the best way to start is to decipher their names and then talk about their performances.
What does ETF stand for and what it is?
Exchange-traded funds, that is to say that they are investment funds that are listed on the stock market, a fund gathers the money of different participants to invest it.
The difference between an ETF and types of mutual funds is that being a publicly traded fund, we can buy and sell shares in it, easily and quickly.
We don’t need contracts or pay subscription or refund fees, we simply need an account with a broker to acquire shares.
ETFs are also sometimes called index funds, because many ETFs replicate an index, for example, there are ETFs that replicate the Spanish Ibex 35, however, not all ETFs are index funds, ETFs are publicly traded funds, some of them replicate index and others do not.
There are ETF funds with investment strategies other than indexation, but since most individual investors who use ETFs use them to invest in indices, both words are sometimes used synonymously, even though strictly talking are not the same.
What does ETC stand for?
ETC stands for Exchange-traded commodities, as its name suggests it reveals something very important and it is true that it is not a list of funds, but of investment vehicles quoted on stock exchanges, which allow investors to be exposed to commodities, either individually or sector ally.
In other words, FTEs allow us to invest in raw materials such as oil, gold or other precious metals and since they are listed on the stock exchange, we can also easily acquire them.
Differences between ETF and ETC
If we say you want to invest in gold and you start your search in just ETF, you will realize that none of the results is an ETF, all or almost all are ETCs, and you will wonder why, this is because there are regulations that determine the operation of investment funds.
In the European Union, for example, these regulations are known as UCITS, for regulatory reasons an investment fund cannot invest more than a certain percentage in a single position.
There is no ETF that invests only in one investment or two of them, an ETF generally invests in dozens of stocks or other financial instruments that is why there are no ETFs that invest in gold.
The alternative then is to invest using an ETC, however, we must take into account that an ETC, is not an investment fund and that has different risks, an ETC is not an asset that is protected in case of the insolvency of the issuer, that is, if the entity that issues the ETC fails, in theory our capital would not be protected.