- Date : 29/05/2022
- Read: 3 mins
An exchange-traded fund (ETF) is an investment fund that is listed on a stock exchange and can be traded just like any other stock. Like other funds, ETFs collect money from a pool of investors and then invest that money in stocks or bonds. The way your money will be invested is determined prior to your investment
ETF shares are traded on a stock exchange. They are bought and sold like shares. ETFs charge fees and commissions from you, but usually, the amount is lower than mutual funds. Different underlying ETFs are available in the market. You can choose from sectoral ETFs, such as banking, IT, etc., to commodity ETFs, such as Gold, Metals, etc. You can also choose International ETFs; for example, FAANG ETFs, which invest in FAANG stocks only.
Some ETFs invest in a specific theme of stocks. For example, Mirae Asset Hang Seng Tech ETF invests in Hong Kong/Chinese upcoming tech companies. Some track the performance of a stock index, while others track the performance of a particular market sector, such as technology or pharmaceuticals. For example, Nippon GoldBeEs tracks the performance of gold.
How can you earn a return from an ETF?
Similar to a stock, you can earn a return in two ways:
- A rising ETF price
Suppose you bought an ETF for Rs 100 and sold it for Rs 120 next year. Thus, you made a 20% return from your ETF investment. If the ETF’s price dropped, the investor would have lost money if the position was sold at a lower price. As ETFs are traded on the stock exchanges, you can buy and sell your ETF positions throughout the trading hours. Also, your value might change depending on the market conditions.
Mutual Funds vs Exchange-Traded Funds
Mutual funds collect money from a group of investors and then actively manage it according to a set of agreed-upon standards included in the policy documents. ETF, on the other hand, can track a benchmark and need not be actively managed.
The management costs in a mutual fund are higher than in an ETF since they are actively managed. An ETF just has to track the performance of the underlying, and thus the management fees are lower.
ETFs Other Attractive Qualities
- An ETF investor can buy a single share and trade it on the stock exchange.
- ETFs have lower management fees than mutual funds. This is because many ETFs attempts to track the underlying and require no active management. Thus, the fees of the ETFs are lower than those of actively managed mutual funds.
- ETFs offer investors a practical way to analyse and potentially find opportunities in several markets with only a bird's eye view of their portfolio.
ETFs are great investment options for lasting results and buy-and-hold investing. Moreover, ETFs are charged at a fraction of the cost compared to other investment options. Hence, ETFs are one of the best-suggested investment vehicles for young investors, especially in the long run.
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