Exchange Traded Funds (ETFs) are investment vehicles that allow investors to buy shares in a fund that holds a basket of assets, such as stocks, bonds, or commodities. ETFs are traded on stock exchanges, similar to stocks, & their prices fluctuate throughout the day based on supply and demand.
Basic Concept
- ETFs are a type of passive investment, which means they aim to track the performance of a specific index or benchmark, such as the Nifty 50, Sensex or Nifty 100 equal weight index.
- ETFs are created & managed by fund house, who are responsible for buying and holding the underlying assets in the fund and ensuring that the ETF tracks the performance of the index or benchmark.
- ETFs can be composed of various types of assets, such as stocks, bonds, commodities, or real estate.
- ETFs can be purchased and sold on a stock exchange throughout the trading day, just like stocks.
- ETFs typically have lower expense ratios than passively managed funds.
Is ETF is good Investment?
ETFs can be a good investment for some investors, but they may not be suitable for everyone.
It’s important to consider your investment goals, risk tolerance, & overall financial situation before deciding if ETFs are a good fit for you. ETFs may also have higher trading costs and lack of control over specific securities held in the fund.
Best ETF in India
ETF vs Stock – what is difference?
It’s important to note that ETFs and stocks can both be good investment options, but they have different characteristics
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ETFs and stocks are both types of investments, but they have some key differences.
| ETF | Stock | |
|---|---|---|
| Composition | ETF is a type of investment fund that holds a basket of assets, such as stocks, bonds, or commodities. | A stock, on the other hand, represents ownership in an individual company. |
| Trading | ETFs can be bought and sold throughout the day on stock exchanges, just like stocks. | Stocks also can be traded through the day. |
| Diversification | ETFs can provide diversification by giving investors exposure to a wide range of assets or market segments | Investing in individual stocks, however, exposes an investor to the risk of a single company’s performance. |
| Management | ETFs are typically passively managed, meaning they aim to track the performance of a specific index or benchmark. | Stocks, are not actively managed and their performance depends on the performance of the underlying company. |
Difference between ETF vs Index Fund
| ETF | Index Fund | |
|---|---|---|
| How they Manage? | The majority of ETFs are passive investments that track the performance of a specific index. | Index Funds also passive investments that track the performance of a specific index. |
| Cost | low expense ratio, but higher trading cost | Marginally Higher than ETF |
| Trading Style | required Demat Account – Buy or Sold at market price | No required Demat – You can Buy or Sold only at price published at the end of each day. |
| Minimum Investment Amount | You can Buy for the price of 1 Unit/share | as per Fund Scheme Min Application amount |
| Liquidity | Sell @market rate. Low volume facing Buy/Sell problem. | Fund House – Repurchase and sold at the end of the trading day Price |
| SIP | Every month you Buy ETF Unit from your Demat Trading Account | Fund house provide this facility |
Advantage of ETF
ETFs have several advantages over other types of investments.
Some of the main advantages of ETFs include:
- Low costs: ETFs often have lower expense ratios than actively managed funds, which can help to increase returns over time.
- Flexibility: ETFs can be bought & sold throughout the day on stock exchanges, allowing investors to quickly respond to changing market conditions.
- Transparency: ETFs are required to disclose their holdings on a daily basis, which can give investors a better understanding of the underlying assets in the fund.
Disadvantage of ETF
In addition to the advantages, ETFs also have some disadvantages that investors should be aware of:
- Trading costs: ETFs can be more expensive to trade than index funds due to bid-ask spreads, which is the difference between the highest price a buyer is willing to pay for an ETF and the lowest price a seller is willing to accept.
- Tracking error: ETFs may not always perfectly track the performance of the underlying index or benchmark, which can result in a tracking error.
- Risk of market manipulation: ETFs can be sensitive to market manipulation, as they are traded on stock exchanges and can be affected by short-term price fluctuations.
- Limited to passive management: ETFs are typically passively managed, which means that they aim to track the performance of index or benchmark & do not attempt to outperform it through security selection or market timing. This may not be suitable for investors who are looking for active management.
- Illiquid market conditions: Some ETFs, particularly those with lower trading volumes, may have difficulty finding buyers or sellers in certain market conditions, which can make them less liquid.
