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All about Exchange Traded Funds
Sectors: ETFs
, Finance
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Exchange Traded Funds or ETF are very famous nowadays. ETF is a recommended investment instrument as a part of your financial planning portfolio thus most of the investors have heard the term. Here I am giving a minimal but most required introduction to this instruments that each investor should know. I am also giving you the advantages and disadvantages of ETF for your better awareness.
As the name shows, an exchange traded fund unit is a bundle of stocks that an investor can buy directly from stock exchange like buying any other stocks or shares. Comparing with mutual funds, when you investing to the ETF, you are diversifying your money to the entire stocks inside a particular group, generally called an Index. Where, mutual funds also following the same path but, investing in a group of carefully selected stocks instead of all the stocks in an index.
ETF by nature track a certain index. For an example, a large cap index focused ETF unit comprises all the stocks that are coming under the large cap index of the stock exchange. For better awareness, suppose an ETF that is tracking the large cap index of a stock exchange comprising 50 eminent companies in the nation and if you are buying a unit of this ETF by paying 50$, or Rs.50, you are getting the investment exposure in each stocks in that large cap index. In this case, you have Rs.50 or $50 invested equally in each 50 stocks of the existing large cap index. That mean, you have invested $1 or Rs.1 on each company in the large cap index.
Generally the ETF price calculation directly depends on the index points. If the large cap index is 4500 presently, the price of a single ETF will be 450. It will high or law as per the fluctuation of the index which is tracking by this ETF.
There are other ETF also available in the market. For example: Gold ETF. With gold ETF the price determination of a unit will be same to the price of 1 gram physical gold. You can see midcap ETF, sector ETF like Banking ETF etc.. all are very popular nowadays.Let us now look at how similar and dissimilar the ETFs are vis-à-vis the conventional MFs.
1. Since all ETFs require certain specific shares to be deposited for units to be created, they all are usually index-specific like Nifty, Sensex, Bankex etc. As against this, a conventional mutual fund can have any portfolio (though as per the pre-defined objective). Of course index funds will also mimic the index and hence to that extent ETFs and index funds are same
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