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Sunday, December 25, 2016

What Are Exchange Traded Funds (ETF)

Exchange Traded Funds (ETF) are securities that track the performance of a commodity (e.g Gold ETF) or an Index (broad-market like the NIFTY or sectoral like the Bank NIFTY) and are traded on a stock exchange.


For example, an Exchange Traded Fund might try to replicate the performance of the NIFTY, by investing in all the 50 stocks that comprise the NIFTY - in proportions equal to the weightage of those stocks in the index. 

Similar to a Mutual Fund, an Exchange Traded Fund is an investment vehicle that pools money from a large number of investors and aims to generate returns at par with the benchmark it is tracking. 

While ETFs might seem similar to close ended mutual funds that are traded on an exchange; there are significant differences between the two. Following are the distinguishing characteristics of ETFs:

1. ETFs can be bought and sold throughout the trading day just like any individual stock. The applicable price would be the price prevailing at the time of the trade. This is in sharp contrast to Index Mutual Funds where subscriptions and redemptions are effected at the closing Net Asset Value (NAV).

2. When buying and selling ETFs, you have to pay applicable brokerage that you'd pay on any regular order

3. ETFs do not carry any entry or exit load that are the characteristics of mutual funds.

Exchange Traded Funds are cash market products. 

The following are some of the benefits of investing in an Exchange Traded Fund. 

1. Trading in ETFs is similar to buying/selling shares in the stock market. To buy or sell an ETF you can either give your broker a call or simply place an order online through your trading account. 

2. Since Index ETF's track the performance of an Index - broad-market or sectoral, an investor can achieve the benefits of diversification by investing in a single ETF. 

3. Since ETF's merely track an index or commodity, they have lower investment and management cost (amounts paid to fund managers) than an exchange traded Mutual Fund. This cost reduction is passed on the investor. 

4. Similar to shares, ETF's can also be short-sold


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