What are ETFs and can Armenian investors become their shareholders?

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YEREVAN, July 26. /ARKA/. An investment boom has been going on in the world for several years already caused by the fact that ordinary citizens have gained access to the stock and bond markets. This trend has reached Armenia as well, and our citizens have started to think about how and where to invest their money./pp

In this context, many people are attracted by the advantages offered by ETFs - Exchange Traded Funds, although often people do not know how to work with them. In a conversation with Narek Gharibyan, Head of Brokerage Department at a href=https://unibankinvest.am/enUnibank Invest/a, we tried to find out what ETFs are, as well as what risks and opportunities are associated with them./pp bARKA /b– Please, tell us what ETFs are and how they work? It is often said that it is the best way for people who start to familiarize themselves with the investment market. Is this really the case?/pp bN. Gharibyan/b – ETF stands for Exchange Traded Funds. ETF is a public investment fund that invests in various assets and issues shares based on these assets. Literally, these funds, which include a variety of securities. This product is considered very convenient and suitable for retail investors for the reason that it is primarily diversified. That is, it operates on the principle that a large investment company (the largest ETF managers are BlackRock, Vanguard and SPDR) buys securities and creates a fund based on them.nbsp; Then they sell shares of this fund to investors on the exchange. Here is an example to make it clear. Let's say you buy a share of Apple and become one of its owners. But when you buy a share of a fund, you become the owner of all the companies that belong to this fund, although not directly.nbsp; This is an advantage, because a novice investor may not know which assets to invest in. Or if he/she bets on one security, this entails certain risks, because something may happen to this company, its share price may drop, and the investor will suffer losses./pp

But when an investor buys shares of an ETF, these risks are leveled, because the fund may contain hundreds of shares, not to mention that it is managed by professionals. The most popular ETF focuses on the SP 500 index.nbsp; An exchange-traded index is a measure (benchmark) of price changes for certain types of securities. In this sense, the SP 500 is a benchmark of the U.S. economy because the index includes the 500 largest U.S. companies./pp

It could also be the Dow Jones Industrial Average, which is the oldest index in the world and includes the largest US industrial companies. It can be an index for a specific sector of the economy, for example, companies from the oil and gas industry or the electric power industry, pharmaceuticals, etc./pp

I can give you a good example about diversification and why an index is better than buying stocks directly, especially for novice investors. For example, Nike shares fell almost 20% in just one day. However, the Dow Jones Industrial Average, which includes Nike stock, did not fall in price, instead it even rose slightly during this period. This perfectly illustrates the fact that if a person were to bet on Nike alone, they would suffer an imminent loss of 20% in a single trading day. But if a person had bought an ETF on the Dow Jones index, they would not have suffered such a loss because there are other companies whose growth has leveled the risk./pp bARKA /b- It turns out that through ETFs Armenian investors can also become shareholders of several foreign companies at once. What about the Armenian stock market? What prospects do you see here?/pp bN. Gharibyan/b - This is a very good question, because I believe that the Armenian stock market is experiencing at least a rebirth, if not formation. Just a few years ago, the stock market, even the local stock market, was not accessible to everyone. That is, it was a kind of privilege. Even banks did not provide services to retail clients. And if a potential investor wanted, for example, to buy American or European securities, he or she had to invest at least $100-200 thousand, so the entry threshold was very high./pp

Now the paradigm has changed, and Armenian brokers, including Unibank, provide access to international markets. Absolutely any investor, even with a small initial capital, for example, $1 000 , can invest in almost all international markets in the USA, Europe and Asia./pp

Moreover, we provide the opportunity to invest via mobile application and web trading terminal, which is very convenient./pp

Now about the prospects. Taking into account the fact that now ordinary retail clients can get access to buying foreign securities, in my opinion, this will push the Armenian market to develop, because a competitive environment will appear./pp

Now clients can buy shares and bonds of major international companies or ETFs in one click, through an application. And, accordingly, the Armenian local market and Armenian companies will have to improve their terms and conditions in order to win over these clients, so that they invest their money not only in the foreign economy, in the foreign market, but also in the local market./pp

One of the breakthroughs of the Armenian stock market over the last few years was the issue of bonds by Armenian banks. But if we talk about the stock market, and even more so about the investment funds market, unfortunately, we do not have any ETF analogues in the Armenian market yet./pp

However, I am sure that the possibility of clients to invest abroad will push the Armenian market to growth. More and more companies will start to enter this market, become public, and more and more companies will issue securities and offer them to Armenian investors. Therefore, this can have an extremely positive impact on the Armenian market and its development prospects./pp bARKA /b- You mentioned that Unibank also provides such an opportunity. How can one open a brokerage account with Unibank Invest? What are the requirements and are there any restrictions?nbsp;/pp bN. Gharibyan/b - We are among those few Armenian banks/brokers that provide an opportunity to invest both in foreign and domestic markets at the same time. Moreover, it should be noted that Unibank is one of the few public companies in Armenia. This means that Unibank shares and bonds can be bought on the Armenian securities exchange, as well as any other securities on foreign stock exchanges through the Unibank Invest application./pp

As for the account opening procedure, it is quite simple: any potential investor can send an a href=https://unibankinvest.am/en#form_enapplication/anbsp; to open an account. Our employee will contact them and provide information about the main terms and conditions, commissions, and subscription plans. And the client will be able to open a brokerage account remotely. They can also come to the bank's office to complete all the necessary paperwork on-site./pp bARKA /b- You mentioned that the threshold used to be hundreds of thousands of dollars, what is the minimum threshold now for an ordinary person to become an investor?/pp bN. Gharibyan/b - That's the point, as I said, the paradigm has changed, now there is no such threshold. If a share costs $10, you can buy one share for $10$./pp

Obviously, that's not the amount you should start investing with, but if we're talking about a minimum, you can, for example, allocate $500 and buy a few ETFs and start building your portfolio./pp bARKA /b- What about risks. There are always risks, so what risks should you consider when investing in ETFs?nbsp;/pp bN. Gharibyan/b - In the context of securities, we can say that risks differ depending on their type.nbsp; For example, the most risk-free instrument is bonds. US Treasuries are considered the most risk-free among them. When we talk about risk, we mean bankruptcy and possible loss of invested funds. In the case of US Treasury paper, in order not to get your money back, you need the US to default. Even if there is a theoretical probability of this happening, it is extremely low./pp

By the way,nbsp; US Treasuries have recently become the most popular instrument among investors all over the world because the yield on them exceeds 5% per annum. a href=https://unibankinvest.am/enUnibank Invest/a offers its clients an opportunity to buy these securities from $1,000. This is a very interesting opportunity in the sense that the entry threshold is very low, and even European brokers offer an opportunity to buy US government bonds from a minimum of $50 thousand or $100 thousand./pp

Therefore, if we talk about risks, we need to understand what instruments and what risks we have in mind. If we are talking about corporate bonds, stocks, ETFs, there are certainly some risks. Certainly, if an investor invests money in one asset, the likelihood of risks increases because the price of that asset may go down and he or she will suffer a loss. That's why first of all a novice or retail investor should pay attention to the largest funds, which include a wide range of companies. Recall my example of Dow Jones and Nike.nbsp;/pp bARKA /b- It turns out that ETFs are an insurance against a sharp fall of a certain stock. But at the same time it turns out that due to the presence of several companies' shares there, if one of them grows sharply, this growth will be leveled at the expense of others. So, isn't it something like a savings fund?/pp/pp bN. Gharibyan/b - Yes, that's right. But, nevertheless, if we compare it with classical products - deposits or bonds, it is not in any way comparable - the return is always higher./pp

Or another example: NVIDIA shares have returned 164% since the beginning of the year. But at the same time, the index showed a return 10 times less, although we are talking about a company whose share in the index is one of the highest. So, yes, if you put everything on one company, you can potentially earn more, but the risks when the share price falls will be much higher.But I think this is the second stage, when a person has gained experience and has some knowledge, he can move to more complex instruments, such as buying shares directly, or using leverage (short / long), or some complex financial instruments, such as options and futures. a href=https://unibankinvest.am/enUnibank Invest/a provides this opportunity to professional clients./pp

It is also worth noting that we help the client with their risk profile. This is important because the client does not always know where to invest. Our employees will determine what the client's risk profile is, what his/her nbsp;goals are, what their nbsp;investment horizon is, what risk they are prepared to take, and so on. As a result, they will help the client make the right decisions./pp bARKA /b- In that case, what advice would you give to novice investors who are considering investing, including in ETFs? Are there any common mistakes to avoid or proven strategies you could recommend?/pp bN. Garibyan/b – Giving advice is a thankless job. But I would probably like to say that a novice investor at the beginning of their journey should follow certain rules in order not to make mistakes, although they are inevitable./pp

Nevertheless, one of the very first rules is to invest only one’s own, excess money. It should not be borrowed funds or the last money. That is, if a person needs to buy a car in the next month or make repairs, or has to pay for the children's education, it is not worth investing with these funds./pp

The second rule is diversification. One should diversify one's assets. That is, they should be investments in different countries, for example, the US and EU countries. If we talk about index funds again, in Europe, there is an index of 600 largest European companies (Euro Stoxx 600), an index of the largest 100 British companies (FTSE 100), an index of French companies (CAC 40), German companies (DAX) and others. There is, for example, the MSCI Emerging Markets Index, which includes companies from developing countries./pp

You should also diversify assets by currencies, economic sectors, asset types and maturities, as well as by the risk levels of different instruments. If these rules are adhered to, the risks will decrease and decrease. Moreover, a href=https://unibankinvest.am/enUnibank Invest/a gives the client the possibility of such diversification. And this is our competitive advantage./pp

Another of the basic rules for beginners I would call patience. Because many people have a false idea about investments, that you can come to the stock exchange and immediately earn 1000% per annum. No, it is not so! Time works for the investor. Virtually any asset has a very high rate of return over the long term./pp

Consider the return of the SP 500 index, which we have already talked about. For example, over the last 10 years the return has been about 180% despite the crisis due to covid 19./pp

If we take an even longer timeframe. For example, as of 1 June 2007 to today, the index return is almost 280%, and since 1 December 1984 it has been over 2980%. So over 40 years, an index return of 2980% is a fantastic figure./pp

If we look at the returns for the current year, the index is up 17%. And the index is, as I said, a benchmark of the U.S. economy - it always outpaces inflation. That's one reason to invest in ETFs./pp

Of course, not all people are professional investors. Everyone is in their own business and can't spend their time analyzing companies from morning to night. ETFs are created for such clients./pp

An important advantage of ETFs is liquidity, i.e. the ability to buy or sell an asset at any time at the market price. For the most liquid funds on the NYSE (New York Stock Exchange), the trading volume exceeds billions of dollars a day./p