What is ETF?
Exchange traded funds (ETFs) are one of the crucial and valuable products offered to investors in recent years. ETFs come with various advantages. If you know how to utilize them well, then they can help you achieve your investment goals. An ETF is a basket of securities that can be bought or sold through a brokerage firm on a stock exchange. ETFs are virtually offered on every conceivable asset class, from traditional investments to alternative assets like currency and commodities.
How do ETFs work?
An ETF like a company stock can be bought or sold when the stock exchange is open. Like a stock, an ETF has a ticker symbol and intraday price data that can be obtained easily during the daytime. The number of shares outstanding of an ETF changes daily as new shares are created continuously and the redemption of existing shares. The price of an ETF is aligned with the underlying securities with its ability to issue and redeem shares on a continuous basis.
Why should you invest in ETFs?
ETFs or Exchange Traded Funds provide a wide scope of investment options and broad diversifications. This offers the investors a wide exposure to various indexes around the world like S&P 500, Russell 1000, NASDAQ-100, Nifty 50, Dow Jones, and more. It gives exposure to the indexes based on three factors- first is market sectors such as agriculture, infra, power, health care, technology, etc. The second is assets such as currency, commodities, fixed income, real estate, etc. The third is the market cap like large cap, medium cap, and small cap. One big plus point of ETFs is that it has a low expense ratio as compared to other investment horizons, which are actively managed.
How to invest in ETFs?
You can invest in ETFs by opening a Demat account and a share trading account with any broker. After opening the account, you can call the broker and place your order, or you can choose to carry the transactions through the online platform of your trading account.
What are the popular types of ETFs?
- Equity Funds – Mostly all ETFs track equity indexes or sectors. Some index ETFs mirror an index in its whole, and some others use representative sampling. An ETF with tracking error above 2% is accounted as actively managed.
- Fixed Income Funds – If you go to any financial professional, then they will recommend you to invest a part of your portfolio in fixed income securities such as bonds and bond ETFs to reduce the volatility of the portfolio. This also provides an additional stream of income.
The other types of ETFs are currency funds, real estate funds and specialty funds.