WHAT ARE ETFS?
ETFs are exchange-traded funds. It is very similar to mutual funds. It is a pooled type of investment operated just like mutual funds. ETFs track index sectors, commodities like gold, or any assets, but it is also traded on stock exchanges. You can sell and buy ETFs on the stock exchange.
ETF prices fluctuate all day long on the stock market depending on which ETF you are tracking and the movement in that sector.
ETF is known as exchange-traded funds because they are traded on exchange just like stocks, making them more cost-effective, and there is no doubt on ETF liquidity, unlike mutual funds. ETFs can also have many stocks of various industries, or they can restrict themselves in one sector.
For example, a Nifty ETF focuses on Nifty. And when the Nifty index moves upward, the price of the Nifty ETF will also go up. Similarly, a gold ETF, banking ETF, focuses on all banking stocks.
Most ETFs are open-ended, which means that they limit their investors. Any number of investors can buy and sell those ETFs. They are open-ended.
There are various types of ETFs:
It is used to give regular income to its investors. They depend on the performance of underlying bonds, including government, local, corporate bonds, etc. bonds have a maturity date, but bond ETFs do not have any expiry. They are usually traded at a discount or premium from the bond price.
Stock ETF contains stocks of a particular sector. It is a basket that tracks all the stocks of that sector, and their performance is combined, which determines the price and movement change of the ETF. It will not give you ownership of actual stocks. It will not give you dividends and shareholders of that stock. But it helps in diversifying the risk as an ETF has high potential stocks and new stocks of that sector.
Sector ETF focuses on that particular sector. It is usually helpful when you are bullish on a particular sector, and investing in that sector’s ETF will keep you updated about that sector. The upward price movement of that sector will show if your ETF price is rising.
For example, the energy sector ETF will determine based on the prices of the energy sector stocks. In case you are bullish on the energy sector, you must buy its ETF.
Like sectorial ETF, commodity ETF tracks the prices of that particular commodity. Shares of a commodity ETF involve no cost compared to keeping that commodity physically. For example, gold ETF tracks the prices of gold, and now you can buy gold on the stock exchange with the help of an ETF. As and when the prices of gold go up, a gold ETF’s price will also go up. You can now invest in 99.99% pure gold just by sitting at your home through an ETF.
PROS AND CONS OF ETF:
Etf contains a lower cost than investing in all stocks of that sector. Now you can have a single transaction of buying and selling that sector or commodity or currency ETF. You have investments in all the stocks of that sector, which is very cost-effective and thus involves less cost than investing in all stocks.
- Now you can invest in many stocks of that sector and not just restrict yourself to one stock of a particular sector.
- The expense ratio is low, and brokerage is low too.
- Diversified portfolio, so the risk is diversified too.
- They are more liquid than mutual funds.
- Suitable for the long term as a Nifty ETF, gold ETF will always go up longer-term.
- An ETF has higher fees if it is managed.
- Single sector ETF restricts diversification.
ACTIVELY MANAGED ETF:
There are actively managed ETFs where the fund managers buy and sell the stocks and change the portfolio with time to give investors a better return.
Actively managed ETFs generally have a higher expense ratio than passively managed ETFs.
- ETF tracks a basket of securities and is a type of index fund.
- ETFs can trade at a premium or discount of NAV of the fund.
- Just like stocks, it is traded on exchange during market hours.
- ETF does not take any commission like mutual funds and thus is cheaper than mutual funds.
- It does not involve ownership of stocks or commodities.
- ETF is a diversified investment as it tracks many stocks of a particular industry or many industries in a single index ETF.
- ETFs are, moreover, more tax-efficient than mutual funds and stocks as they are traded in kind and not redeemed in cash.
IS ETF LIQUID and HOW LIQUID ARE ETF’s?
Yes, ETFs are liquid as they are traded during market hours, just like stocks. You can sell and buy an ETF anytime during market hours. Some actively traded ETFs make it easy for investors to buy and sell and find their meaningful buyer and seller at that particular time to trade. ETFs are reasonable risk diversified investments that are cost-effective, tax-efficient, and liquid. You can now invest in a particular sector or all stocks of that particular sector, or you need not have any knowledge of stocks you can now invest in index ETF, which will rise over some time, thus giving you greater returns and that too stress-free. Happy investing!