What are Exchange Traded Funds (ETF)?
Exchange-traded funds, commonly known as ETFs, are financial instruments that can be easily traded on a stock exchange like any other securities. ETFs are a combination of mutual funds and equities of the listed company. This means that ETFs are a bundle of different classes of securities activating the feature of diversification and the flexibility of equity (stock). In simple words, ETFs are a bunch of stocks, debentures, bonds, and other assets combined together as a single fund, that can be traded freely on a stock exchange. However, it shall be noted that ETFs are different from Mutual Funds on the following basis:
- ETFs are freely traded on a stock exchange and can be sold and bought by the investor, which is not possible in the case of Mutual Funds.
- Unlike Mutual Funds that are allotted Net Asset Value (NAV) at the end of each trading period, ETF’s value is highly fluctuating that keeps on changing throughout the day depending on its demand and supply and replicates the return on indexes, which are likely to be different from the actual index.
- ETFs as compared to Mutual Funds are more cost-efficient.
Table of Content
- How do ETFs Work?
- Types of ETFs
- Benefits of Investing in ETFs
- Risks of ETFs
- How to Invest in ETFs?
ETFs are created and designed to track a particular market index or sector. At present, there are several ETFs functioning on the basis of sector-specific, asset class-specific, country-specific, and broad-market indexes. When an investor buys shares in an ETF, he/she buys a portion of the underlying assets that make up the fund. However, it shall be noted that like Mutual Funds, investment in ETFs is also made according to the investor’s financial goals, management cost, trading flexibility, risk appetite, and portfolio requirements.
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