What is an exchange-traded fund (ETF)?

Exchange Traded Fund (ETF) - What are ETFs and Why to Invest?


To begin, an ETF (Exchange-Traded Fund) is a type of mutual fund. Like a mutual fund, it pools money from various investors, has a fund manager and a Net Asset Value. An ETF, on the other hand, has two distinguishing characteristics that set it apart:

  • An ETF, like stocks, can be exchanged on a stock exchange (in the secondary market).
  • It’s an actively managed fund that typically follows an index, and it’s becoming one of India’s most common types of passive investing.

Trade ETFs, including bonds, are traded on a stock exchange. Investors may exchange them like stocks, and the price of each ETF unit is dictated by market demand and supply rather than the NAV. To trade in ETFs, they must first open a deposit account and then a trading account.

Different types of ETFs-

There are four types of exchange-traded funds (ETFs):

  • Equity ETFs – These exchange-traded funds monitor the performance of stock indexes or a group of stocks in a specific industry or market. The aim is to invest in stocks that will replicate the success of the index or sector.
  • Gold ETFs – Gold is thought to be good protection against currency fluctuations and economic downturns. On the other hand, investing in physical gold has several drawbacks, including stability, cost, resale, and taxation. Gold ETFs are exchange-traded funds that invest in gold bullion and enable investors to include gold in their portfolio without investing in physical gold.
  • ETFs with foreign exposure – Some ETFs watch stock indices from different countries. They give investors access to foreign markets and allow them to participate in those economies’ growth stories.
  • Debt exchange-traded funds (ETFs) – These ETFs invest in fixed-income securities.

Why Should You Invest in Exchange-Traded Funds (ETFs)?

An ETF is a great way to invest in stocks and diversify your portfolio. When you invest in stocks, you can only buy a certain number of stocks depending on the amount of money. As a result, picking the right stocks is critical. When you invest in an ETF that monitors a sector or asset class, you gain exposure to a wider variety of securities, allowing you to diversify and strengthen your portfolio. The following are some of the advantages of investing in ETFs:

  • ETFs can be traded on stock exchanges just like stocks.
  • Because units are exchanged at market prices dictated by investor sentiment, you will benefit if the market view of the sector/market that the ETF monitors is favorable.
  • Unlike mutual fund units, which must be redeemed at set times to take advantage of the current NAV, you can buy and sell units at any time during the day.
  • An ETF’s cost ratio is typically smaller than that of most traditional mutual funds (especially actively managed mutual funds)

Final Thoughts

Remember that understanding the investment choices available and working on an investment strategy focused on financial targets, time horizon, and risk tolerance are the hallmarks of a good investor. Before you start looking for an ETF to invest in, make sure you have a strategy in place and understand how ETFs function. Since these funds are actively managed, they aim to approximate the index’s returns rather than outperform them. As a result, keep your goals realistic. You are a risky investor or trader; you may want to allocate a small portion of your portfolio to ETFs for stability. Consider your options carefully and invest wisely. Before investing, you can check more information from https://www.webullapp.com.