What Is An Exchange Traded Fund (ETF)? – Explained

Imagine going to book a countryside villa for you. You might be having a budget and a vision of your kind of luxurious home. What would you do to match both the demands? Asking something extra on the budget you wanted to stick to. In stock market investing, the same scenario applies. You wanted an extra deal with the existing ones, ETF(Exchange Traded Fund) plays the role here.

What Is ETF Exactly?

ETF or Exchange Traded Fund is a kind of mutual fund that is traded like a stock exchange just the way individual stocks are traded. 

Exchange-traded funds just going by their name, directly gets with the brokerage  account for selling or buying of stocks. An ETF consists of securities, commodities, and index funds. Above all, the advantage here is that you can buy or sell stocks anytime you want on the stock exchange. 

This has made investors get a better platform to experience growth and profitability in the stock market. Unlike other forms of investing it is a bit less costly.

How To Invest In Exchange Traded Funds?

There are two easy methods to follow to invest in ETF:

• Simply call your broker and place a trade order, sitting in your comfortable space. 
• This can simply be done through their online terminal, you just need a device and internet connection. Transaction of ETF is done the same way as investing in shares in the stock exchange on the trading terminal.

Types of Exchange Traded Fund.

• Index ETF

Index ETF is known to be the oldest exchange-traded fund. They have returns corresponding to the benchmark index that they replicate. They only buy those shares that directly reflect the securities of the corresponding index. 

These have the least expenses ratio and helps in diversifying your investment all over the asset classes. During the trading hours, you can buy or redeem it. 

• Gold ETF

It is an open-ended market that allows you to get into the bullion market without actually buying the physical gold. It is also an alternative to invest in physical gold and at the same time invest in this sector. You can invest in some small denominations via SIPs(Systematic Investment Plans). 

Physical gold comes with charges while going for Gold ETF is liquid and can be traded on the stock exchange. Gold ETF is considered a low-risk investment, its value fluctuates when the gold is appreciated. 

• Bank ETF

As per the name, this is invested in the stocks of banks listed in the index.  The bank is the heart of all financial activities, this can be a volatile market and therefore easily be traded on the margins. 

It has a lot of advantages as they are liquid and you can easily track the movement and take the stand. 

• Liquid ETF

This ETF has a low risk of returns and is highly liquid. Meanwhile, liquid ETFs invest 95% of assets in the tri-party repo and the remaining 5% is invested in money market and debt securities. In the tri-party repo, the third party acts as an intermediary between the two parties to the repo, such that it facilitates services like payment, settlement, collateral selection, and custody in the transaction lifecycle. 

There is one advantage here, as the major investments happen at midnight in terms of the third-party repo. This then limits the impact of the price of investment due to market movement. 

• International ETF

In the International ETF, the investment is done in foreign-based securities. This focus is majorly on a global, regional, or specific country. Investing in a single foreign country is a high risk than spreading the investment in different nations worldwide. 

The International ETF gives you exposure to investing in diversified stocks across the globe also it gives you a profit of currency fluctuation as the underlying exposure of assets in the foreign currency. 

• Bond ETF

It has a sector to invest exclusively in bonds. This comes bagged with the advantage of passive exposure to benchmark bond indices at a reasonable cost. This is also a high liquid ETF investment. Bond ETF unline active-exchange-trade funds have a maturity bucket like short. Medium and long term. 

There are some ETFs which has a defined maturity also termes as target maturity bond ETFs. Their taxation is done just the way of debt mutual funds.

Advantages of investing in ETFs

• Flexibility in Investment

The process of trading is the same as the common trading of the stock market on the stock exchange. This gives the advantages of intraday movements in the stock market. Although this feature is not in open-ended mutual funds.  

• Low Fees

The management fees of the ETFs are equivalently low as the most common ETFs in India are Index ETFs. They are formed by mimicking the Sensex or Nifty. As the fund manager’s role is to rebalance the fund portfolio as per the index, hence the fees become lower. 

The operational and distribution expenses are low as compared to other managed funds because they are passively managed. This makes the ETFs cost-efficient. 

• Diversification

Investing in ETFs gives a handful of advantages, investing in different equities, sectors, and various market segments. You can build a customized portfolio based on your financial outcomes at a low cost. 

Conclusion

ETFs offer index funds and stock benefits in a single product. This is a pathway to diversify your portfolio. Due to this diversification, you can get exposure to different groups and sectors. 

In the end, always consider all the necessary charges, risks, and expenses you are about to bear once you purchase any of the ETFs. Keep in mind that the fund matches the investment goals.

Some Frequently Asked Questions (FAQs)