An exchange-traded fund is a bundled security that comprises multiple types of shares and securities. It trades on the stock exchange like any other security in the market. You can buy a single ETF to invest in multiple shares.
An ETF provider selects a range of assets, such as stocks, bonds, commodities, or currencies, and assembles them into a basket. Thereon, an ETF is issued in the market with a specified ticker. Investors can purchase shares of this basket in a similar way they would buy shares in a company. ETFs are traded on a stock exchange where buyers and sellers can trade them daily.
The underlying assets are owned by the fund provider, who creates a fund to track its performance and offers shares of this fund. While you may own some of the ETF, you do not directly own the fund's underlying assets.
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ETF follows a stock index and pays lump-sum dividend payments or reinvestments from the companies within the index.
Here is a detailed list of the types of ETFs that exist:
Equity ETFs
Equity ETFs primarily invest in Equity and here are the major types of ETFs that exist:
● Core Equity ETFs: These ETFs track broad market indices like the Nifty 50. These are passively managed ETFs that offer diversification and exposure to different types of securities. The Motilal Oswal Nifty 50 ETF is an example of this type of ETF.
● Sector ETFs: Focused on specific sectors such as automobile, healthcare, or financials. If you are bullish on a particular sector, you can invest in that sector's ETF. The Motilal Oswal BSE Healthcare ETF perfectly fits this category.
● Theme ETFs: These ETFs invest in companies that align with specific themes like clean energy, or ESG factors. These ETFs provide targeted exposure to emerging trends. The Motilal Oswal Nifty Smallcap 250 ETF is a good example of a Thematic ETF.
●Smart Beta ETFs: These ETFs use alternative weighting strategies beyond traditional market capitalisation. These are actively managed funds wherein the fund manager accounts for factors like value, momentum, or growth.The Motilal Oswal NIFTY 200 Momentum 30 ETF perfectly fits this category.
Fixed-Income ETFs
These ETFs invest primarily in Bonds which are further categorised by credit rankings and issuers. Here are the major types of Fixed Income ETFs that exist:
●Government Bond ETFs: These ETFs track government bond indices and provide exposure to sovereign debt. They are also low on volatility and provide a consistent income from coupons.
●Corporate Bond ETFs: Invest in a basket of corporate bonds and provide access to higher yields compared to government bonds.
●High-Yield Bond ETFs: These ETFs focus on bonds issued by lower credit-rated companies and offer higher returns but with increased default risk.
●Emerging Market Bond ETFs: These ETFs invest in bonds issued in developing countries. The issuers are primarily from governments or companies in countries like India and Vietnam. They have a high potential for returns but also expose investors to currency rate fluctuations and political risks.
Commodity ETFs
These ETFs invest in the major commodities that are traded on the market like gold, silver, oil, etc.
● Gold ETFs: They track the prices of gold. They are also a good hedge against inflation and market volatility.
● Oil ETFs: They track the prices of crude oil. They provide an exposure to the energy sector.
● Agriculture ETFs: Invest in various agricultural commodities such as corn, soybeans, or wheat.
Advantages of ETFs
● Intraday Trading: Mutual fund prices are decided only at the end of a trading day. However, ETFs can be traded at any time during the day.
● Transparency: Most ETFs are required to report their holdings daily.
● Flexible Trading Options: Since ETFs are traded like stocks, investors can use various order types (e.g., limit orders or stop-loss orders) that are not available with mutual funds.
Risks of ETFs
●Cost of Frequent Small Investments: If you frequently invest small amounts, it may be less expensive to deal directly with a fund company offering a no-load fund.
●Tracking Error: While ETFs track their underlying index closely, technical issues can sometimes cause deviations from the index.
● Settlement Delay: ETF sales are settled two days after the transaction, which means your funds from the sale are not available for reinvestment during that period.
Conclusion
By combining various types of ETFs, you can create a portfolio that suits your risk profile and investment strategy. However, so many options can end up confusing you, so it’s advisable to seek financial advice and get tailored insights and help you navigate the wide range of available ETFs.
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