What are Exchange Traded Funds (ETFs) ?
A security that tracks an index, commodity, sector, or other asset, but that can be traded on an exchange like a stock. An ETF is called an exchange traded fund because it’s traded on an exchange just like stocks.
Common ETFs are Nifty Bees, S&P 500 ETF, Gold Bees.
Exchange traded funds are marketable securities with a specified price for the bundle or index tracked. Easier to trade on an exchange. Popular choice for diversification as it holds various asset classes under one ETF. ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes.
Mechanism of ETF
- Fund provider owns the underlying assets, designs a fund to track the performance and sell shares in that fund to the investors.
- Investors own a portion of the ETF but not of the underlying asset.
- ETFs are designed to track the value of an underlying asset or index.
Advantages of ETF
Liquidity: ETFs can be sold throughout the day over stock exchanges, though some funds are more frequently traded than others.
Lower cost: ETFs have much lower expense ratios than traditional mutual funds.
Transparency: ETFs disclose the fund’s holdings and its NAV daily for open-ended schemes and close-ended schemes.
Diversification: ETFs allow investors to diversify their portfolio across horizontals such as industries, sectors, styles, or countries.
Types of ETFs
Equity ETFs
Equity ETFs track an index of equities. You can choose ETFs covering large businesses, small businesses, or stocks from a specific country. Equity ETFs also let you target sectors that might be doing well at that time, like tech stocks or banking stocks, which makes them a popular choice.
Bond/Fixed Income ETFs
Spreading your investment risk is just good practice. That’s why most professionals will also invest in fixed-income and bond ETFs that provide steady return at potentially lower risk than equity ETFs.
Commodity ETFs
Often harder to access than stocks, ETFs are a great way to get into commodities like gold, silver or oil. These are an attractive alternative to stocks to further diversify your portfolio and risk.
Currency ETFs
Currency ETFs will invest in either a single currency, like the US dollar, or a basket of currencies. The ETF will either invest in the currency directly, use derivatives or a mix of the two.