Exchange-Traded Funds (ETFs) are very popular investment funds for investors. In the last few years, the popularity of ETFs has increased significantly. Many companies have launched different types of ETFs to provide investors with diversification of stocks. Investors can invest in diversified portfolio with ETFs. They are like a basket of securities traded on exchanges, similar to stocks. Their share prices usually fluctuate all day due to the buy and sell process of traders.
Exchange-Traded Funds (ETFs) are the collection of listed investments that can be traded on the stock exchange. ETFs include equities, bonds, and other securities. They allow you to invest in a diversified set of securities at once and at a lower price than any other type of fund. Commonly, ETFs are managed either passively or actively.
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Passively managed ETFs are structured to track down indexes such as NIFTY 50. This enables the investors to invest the same proportion of money, Nifty 50. They are also used to track the index of any sector or commodity, such as gold price. Like the company’s shares, ETFs also have certain ticker symbols as their identifier.
ETFs include mutual funds and conventional stocks. ETFs, along with their symbols and underlying, are listed on security exchanges and are traded by traders or investors all day. Their prices normally fluctuate according to market forces. Investors can easily find the list of ETFs on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) websites.
Following are some of the popular types of ETFs you can invest in.
These ETFs track an index like SENSEX or NIFTY 50. It gives exposure to different companies comprising a single index via single investments.
These types of ETFs are structured to track the baskets of stocks related to any particular sector or theme, such as technology, pharmaceuticals, or oils.
These ETFs track international market indexes, such as the NASDAQ 100 index. These ETFs enable investors to invest in a more diversified international portfolio.
Commodity ETFs track the price of commodities like oil and gold.
These funds are structured for leveraging to boost returns.
ETFs are of great importance. Here are some of its benefits that every investor must know:
Every ETF investor should know the terms like NAV, tracking error, and market price before investing in ETFs.
The value of the underlying assets of any ETF is its Net Asset Value (NAV).
The price at which the ETF units are bought or sold on the security exchange is known as its market price.
There is always a small difference between the NAV and the market price of the ETF based on their demand and supply. When an investor buys or sells any ETF, the return will depend on the market price, not on the NAV.
Any difference between ETF’s performance and the index is a tracking error. High tracking error leads to a higher difference in ETF’s performance and index. Therefore, it is good to choose ETFs with low tracking errors.
ETFs are low-cost investments with more diversified options. Different ETFs allow the investor to target their market and take exposure to a broad market or commodity. Passive ETF investment options are good for investors, as it has lower tracking error than index funds. Investors can invest in ETFs by purchasing them from NSE and BSE.