What are Exchange Traded Funds?Exchange Traded Fund or ETF invest in diversified securities including bonds, equity, commodity, an index or a bouquet of equity assets such as an index fund. It can be traded on stock exchanges similar to the equity stock of companies, unlike mutual funds.
The units of an ETF are usually bought and sold through a registered broker of a recognized stock exchange. The stock exchange lists the units of an ETF and the NAV (Net Asset Value) varies as per market movements. Unlike mutual funds that have NAV calculated at the end of each trading day, an ETF's price changes throughout the day. ETF provides the benefits of diversification of index funds plus flexibility of a stock.
How do ETFs work?An ETF usually represents a basket of products/assets. This type of investment tends to own the assets underlying the fund. Such assets include but are not limited to company stocks, oil futures, gold, foreign currency, and bonds.
In India, gold and index-linked ETFs are the most common types available to individual investors. The ETF divides the total assets it owns into smaller units termed as shares, which can be traded on the exchange.
Thus the current trading value of an ETF is based on the applicable value of net assets that the Exchange Traded Fund owns at that point of time. The shareholders of an ETF are also liable to receive profits earned from the underlying assets in the form of dividends or interest earned.
In simpler terms, an ETF may be considered similar to a mutual fund. It can be bought and sold on the stock exchange, and its trading value can change in real time.
Advantages of ETFs
Available to all types of investorsDue to the unique structure of ETFs, all kinds of investors, whether retail or institutional, long-term or short-term, can use it to their advantage without being at a disadvantage to others.
Cost EfficientETF is a cost-efficient product and often considered unique because of the low expense ratio. A lower fund management fee can generate incremental savings and therefore, increase payouts in the long term.
DiversificationDiversification is another significant benefit that an investor derives from ETF investments. One can potentially choose from a wide range of ETFs, which mainly differ based on the underlying asset such as gold, equity or index funds.
Better Risk ManagementSince ETFs are managed by market experts and best in class fund managers, they come with the advantage of better risk management, thereby reducing your overall risk exposure.
Trading FlexibilityUnlike mutual funds, ETFs provide you trading flexibility. You can trade the ETF on a stock exchange just like any other stock. The instant trading feature of ETF makes intraday management of the portfolio easy. ETFs can be purchased at a margin and even sold short. You can channelize your money from bonds to gold to equity in a snap.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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