What are Exchange-Traded Funds (ETF)?
Exchange-Traded Funds (etfs) Meaning
An exchange-traded funds (etfs) types of investments fund that tracks an underlying index. ETFs are traded on stock exchanges just like stocks, and their prices fluctuate throughout the day.
This gives investors the ability to buy and sell ETFs at any time, which can be helpful for managing risk and taking advantage of market opportunities.
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Why it is done?
ETFs were created to provide investors with a more cost-effective and efficient way to invest in a basket of securities. With that also,
- Lower fees than mutual funds.
- They can be traded throughout the day which gives investors more flexibility.
- ETFs can be used to invest in a variety of assets, such as stocks, bonds, and commodities. This can help to reduce risk.
How does Exchange Traded Fund works?
When an investor wants to invest in exchange traded fund, it works in the following steps:
- An ETF issuer creates an ETF by pooling money from investors and investing it in the underlying index. The ETF’s shares are then created and listed on a stock exchange.
- When investors buy ETF shares, they are buying a small piece of the underlying index.
- The price of an ETF share is determined by supply and demand, just like the price of a stock.
Exchange-Traded Fund are a popular investment option for a number of reasons. They offer a number of benefits over traditional mutual funds, including lower fees, liquidity, and diversification.
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Benefits of Exchange-Traded Funds
ETFs have had a significant impact on the investment landscape. They have made it easier and cheaper for investors to invest in a variety of assets, and they have also helped to increase trading volume on stock exchanges.
| Impact | Description |
| Increased Accessibility to investment | ETFs have made it easier for investors to access a variety of investments, such as stocks, bonds, and commodities. This is because ETFs are traded on stock exchanges, which are more accessible than traditional investment vehicles, such as mutual funds. |
| Reduced costs | ETFs typically have lower fees than mutual funds. This is because ETFs are passively managed, which means that they do not require a team of analysts to make investment decisions. |
| Increased transparency | ETF prices are determined by supply and demand, which makes them more transparent than mutual funds. This is because mutual fund prices are not always determined by supply and demand, but can also be influenced by the fund manager’s investment decisions. |
| Increased liquidity | ETFs can be traded throughout the day, which gives investors more flexibility. This is in contrast to mutual funds, which typically only trade once a day after the market closes. |
Let’s see an ETF examples:
| ETF Name | Ticker Symbol | Index Tracked |
| Nippon India Nifty ETF | NIFTY | Nifty 50 Index |
| UTI Nifty 50 ETF | N50 | Nifty 50 Index |
| HDFC Sensex ETF | HDFCSENSEX | BSE Sensex 30 Index |
| ICICI Prudential Nifty Next 50 ETF | ICICINIFTYNEXT50 | Nifty Next 50 Index |
| Mirae Asset Largecap ETF | MUTF50185 | Nifty 50 Index |
Summary:
This is just a small sample of the many ETFs that are available. When choosing it, it is important to consider your investment goals, risk tolerance, and time horizon. You should also compare the expense ratios of different ETFs to find the one that offers the best value.
Also Read: What is Preferential Equity allotment?