What are ETFs And How Do They Work? - Motilal Oswal
What are ETFs And How Do They Work? - Motilal Oswal

What are ETFs And How Do They Work?

In order to be able to navigate the stock market with ease, it is important to be well versed with all that it entails. This includes having an understanding of what Exchange-Traded Funds (or ETFs) are and how they operate.

What are ETFs?

Should you ever wonder “What is an ETF stock?”, exchange-traded funds (or ETFs) refer to a collective set of securities whose shares are available for sale on a given stock exchange. ETF shares have an amalgamation of features akin to stocks, mutual funds, and bonds. For instance, trading practices pertaining to them are active during the day and their prices vary in accordance to supply and demand thereby functioning much like individual stocks. If we consider their ownership style, it runs parallel to mutual fund shares which imply percentage ownership of a given portfolio put together by a professional manager for the same. Online Demat accounts allow for investments to be made in an ETF.

Types of ETFs and How they Each Work –

ETFs, vary on the basis of their investment focuses. Some of the more popular investment focuses of ETFs have been examined below.

- Active equity ETFs – Here, managers are entitled to use their judgment when purchasing investments rather than focusing solely on a benchmark index. Although active ETFs may bring with them exceptional performance which might surpass the market benchmark, they have a higher level of risk and greater costs associated with them.

- Diversified passive equity ETFs – These ETFs tend to perform in accordance with popular stock market benchmarks including the S&P and the Dow Jones Industrial average.

- Fixed-income ETFs – Here, the focus is aligned towards bonds as opposed to stocks. Although they are managed with vigor, they have a smaller turnover and are relatively stable for the most part.

Why Invest in an ETF? –

ETFs award their investors with a degree of tax efficiency that can be absent in the case of mutual funds. Moreover, owing to the fact that management of these ETFs is more along the lines of copying underlying benchmarks, costs associated with annual expenses are considerably fewer. They allow for trades to be made with flexibility and don’t require a minimum investment in order to invest in them.

Conclusion

Each of the aforementioned features adds to the appeal of ETFs. Open a Demat account online such that you too can take advantage of these features. It is important to do due diligence prior to making any buy, sell or hold decisions pertaining to securities  you might have your eye on. This preliminary research can reduce the potential of your incurring any risks and / or losses and can potentially allow you to accrue greater returns.

Related Blogs: Beginners Guide to Investing in ETFs | Invested in ETFs - What you need to track and monitor? | What to track when you are invested in Exchange Traded Funds (ETF)?

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