What is an exchange-traded fund (ETF)?

Like other mutual funds, an exchange-traded fund (ETF) is a pooled investment asset. ETFs may be bought or sold on a stock market in the same manner as conventional stocks, unlike mutual funds. Still, they usually follow a specific index, sector, commodity, or other asset. An exchange-traded fund (ETF) can monitor many asset classes, ranging from a broad assortment of securities to the value of a single commodity. Even more, ETFs may be set up to reflect certain investing philosophies.

ETF meaning

An exchange-Traded Fund or ETF definition is an exchange-traded product that represents a diversified portfolio of stocks, bonds, or commodities. Like individual stocks, ETF units can be readily exchanged at the prevailing market price throughout the trading session.

Knowing what Exchange-Traded Funds are follows specific measures, such as the CNX Nifty or the BSE Sensex. You buy a piece of an ETF's portfolio when you buy units. This portfolio is meant to copy the yield and profits of the ETF's index, subject to tracking error. Diverging from the goal of outperforming their benchmark index, ETFs prioritize tracking the broader market's performance.

ETFs trade on stock markets like common stocks, which makes them different from standard mutual funds. As traders buy and sell shares on the exchange, the market price of an ETF changes throughout the day. The supply and demand for an ETF's units determine its market price. The net asset value of the stocks that make up the ETF portfolio determines this trade value.

Key Features:

Market trading: Unlike mutual funds that are valued post the market hours on each trading day, ETFs are bought and sold on stock exchanges, providing investors with the opportunity to trade them out at market prices during trading hours, unlike most mutual funds that are usually valued at the NAV by the end of the trading period.

Diversification: Most of the time, ETFs try to mirror an underlying index, commodity, or composite asset, subject to tracking error. The natural diversity in this spreads risk across many stocks, exposing buyers to different markets or sectors.

Liquidity: Being traded in stock exchanges makes ETFs highly liquid. It provides a wide range of market activities like entering and exiting at the times of market hours plus lower bid-ask spreads, more than any other liquid investment.

Transparency: ETFs usually make disclosures daily, providing investors with information about their assets. Transparency helps investors to make the right decisions.

Cost efficiency: Most of the time, these are less expensive than professionally managed funds. This is due to their passive management approach, which involves tracking an index rather than relying on active fund managers.

Considerations

Despite the benefits associated with ETFs, investors need to account for several concerns. An ETF’s market price may differ considerably from its NAV, making it possible for investors to purchase at discounted prices or sell at higher prices if they are willing to incur an opportunity cost. It's crucial to grasp the underlying index or strategy it tracks to align an ETF investment with one's overall financial objectives. Investors should weigh trading costs, management fees, and ETF liquidity before any investment decisions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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