Exchange Traded Funds (ETFs) as name suggest are funds that trade on open exchanges. EFT is defined as a security that tracks an index, a commodity or a basket of assets like an index fund but
trades like a stock on an exchange and experiences price changes throughout the day as it is bought and sold.
ETFs are created to represent a basket/portfolio of securities that track a stock, bond, real estate, or commodity index. It boasts the assets of various types in a portfolio like an Index Fund. Instead of tracking a particular company, like a stock does, they track different countries, sectors, and asset types. For example, they could track a group of stocks or bonds representative of a particular country’s market; stocks from a particular sector, industry, or index; and other investments, like precious metals. But its trading is done like shares in exchange. The probability of fluctuations in the prices under ETF remains all the times like shares. Since its trading is done like shares, thus the price of its total assets could not be combined daily like NAV mutual fund. In other words, an ETF could have an NAV distinct from its market price. When you buy ETF, then you get the mutual fund full of diversity. It’s a low-cost way to build yourself a diversified portfolio. You also have the facility to sell it in short term.
ETF are index-tracking funds. They are designed to track the performance of a specific market. ETFs by nature track a certain index (e.g. Nifty or the Bankex). Hence, the returns one can expect from ETFs will be equal to the rise in the index. Which means if the index or sector your ETF tracks does well, so does your ETF. If the index drops, the price of your ETF will also drop. ETFs trade like stocks, which means you can buy and sell them intra-day. This feature is attractive, but comes at a price. You pay a brokerage fee when you buy or sell ETFs, a drawback for those who make small and frequent transactions.
Features OF Exchange Traded Funds (ETFs)
- An ETF is an investment portfolio that trades like a stock in an exchange
- An ETF represents a basket of stocks that reflects an index
- Many ETF’s help you achieve Portfolio Diversification
The Benefits Of Exchange Traded Funds (ETFs)
- Quick and cost-effective diversification
- Easily bought and sold, like stocks
- Usually simple and transparent