What are ETFs? All you need to know about
ETF (Exchange-Traded Fund)
A potluck is an excellent symbolization of an ETF. We have all been to a potluck party; what do we do?
We combine all we have brought and then fill up a plate with the different assortments! An ETF is similar to this mixed plate. An ETF is like a mutual fund; however, it isn’t the same.
A mutual fund is a collection of various securities based upon the theme of that particular fund. These securities are bundled together and sold as a unit.
The investors thus receive these units, which are representative of the investments made by the fund manager.
ETFs, help laymen investors grow their wealth with ease and convenience.
An ETF eliminates the time and resources an investor would have to devote if they have to make a strategy for investments manually. An ETF manager replaces this need for research for the investor.
Similarly, an ETF is like a mutual fund that traces security, commodity, or asset based on the type of ETF one chooses. An ETF is a marketable security traded in the stock market, just like shares.
Where are ETFs Registered?
An ETF is registered with the US Securities and Exchange Commission (SEC) in the New York Stock Exchange or the Nasdaq and with the Securities and Exchange Board of India (SEBI) if traded in the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE)
The ETFs have a ticker symbol similar to stock symbols, and they can be easily bought and sold through a broker. The price of an ETF fluctuates all day, just like stocks as per market movements.
The value depends upon the fluctuations in the underlying assets of the resource pool. Unlike mutual funds settling only once a day, one can easily buy or sell these ETFs during market trading hours.
Exchange-traded funds have mostly been there for retail investors like you and me, which will resemble the performance of the underlying assets. However, ETFs have grown popular among hedge funds and institutional investors nowadays.
Some of the biggest ETF management companies are Blackrock, Vanguard, State Street Global Advisors, Invesco PowerShares, etc. Several types of ETFs try to replicate a specific index or a benchmark with the help of the underlying asset allocation.
ETFs track market sectors as a whole. Different types of ETFs are
- Commodity ETFs
- Sector and industry ETFs
- Bond ETFs
- Foreign currency ETFs
Speciality funds are a very peculiar type of ETF. An inverse fund tracks an index or a benchmark inversely, which will gain when the particular index performs shabbily.
Let us go through all these types of Exchange Traded Funds.
ETFs have proven to be quite resourceful and pocket-friendly for investors looking to invest in specific asset classes, sectors, commodities, etc. Such investors save their research time as well.
Their low cost has opened gateways for all types to invest in thematic funds and hence are also suitable for long term holdings. People eyeing a sector themed investment have benefited from such ETFs.
Investors are also using ETFs to hedge their portfolios against possible market fluctuations. If their portfolio goes for a ‘see’, investors have an ETF that goes for a ‘saw’, thus providing the golden balance just like a perfectly swinging see-saw.
Historically, ETFs have been a revolutionary investment product.
Trading is done very simply, just like stocks. ETFs offer diversification across the industry. ETFs are tax-efficient like mutual funds.