An exchange-traded fund or ETF is something that one might come across when they are going through any stock exchange website or visit the exchange directly itself. Now, you might wonder what it is and how it is related to mutual funds. This blog will talk about exchange-traded funds, its type and how it is different from mutual funds.
An Exchange-traded fund is a security that is traded on the exchange market. Because it trades on an exchange like stocks, an ETF is termed an exchange-traded fund. As stocks are purchased and sold on the market, the price of an ETF’s shares will fluctuate during the trading day. On the other hand, mutual funds are not traded on a stock exchange and only trade once a day after the markets shut.
An ETF, like a stock, is a type of investment that holds numerous underlying assets rather than just one. ETFs are a popular alternative for diversification because they contain a variety of assets. An ETF can own hundreds or thousands of equities in various industries, or it can focus on a single industry or sector. Investors can choose from various ETFs that can be used to generate income, speculate on price gains, and hedge or partially offset risk in their portfolios. There are different types of ETFs, and they are:
Bond ETFs- Government, corporate, and state and local bonds, often known as municipal bonds, may all be included in bond ETFs.
Industry ETFs– ETFs that track a specific industry, such as technology, banking, or the oil and gas sector, are known as industry ETFs.
Commodity ETFs- Funds that are invested in commodities such as crude oil and gold.
Currency ETFs- Funds that invest in foreign currencies like the Euro, the US, and the Canadian dollar.
Inverse ETFs– By shorting equities, inverse ETFs try to profit from stock falls. Shorting is the act of selling stock and then repurchasing it at a lower price, anticipating a price drop.
Difference between ETF and Mutual Funds:
The similarities between mutual funds and exchange traded funds (ETFs) are striking. Both are made up of various assets and are a typical approach for investors to diversify their portfolios. However, there are significant disparities in how they are managed. Mutual funds can only be purchased at the end of each trading day at a preset price, whereas ETFs can be traded like stocks. Mutual funds are also actively managed, which means that a fund manager decides how the fund’s assets are distributed.
Conclusion: Exchange-traded funds can be excellent vehicles for making a passive investment in the Indian share market. When dealing with ETFs, you need an experienced hand like Tradeplus to provide you with trading accounts, platforms, and advisory services. If you need more information on ETFs to take an informed decision, please check here.