Exchange-Traded Funds: What are they?


Exchange-Traded Funds or ETFs are listed and traded on exchanges like stocks. It is a fund that pools the financial resources of several people and uses it to purchase shares, bonds, derivatives, etc. The trading value of an ETF is based on the net asset value (NAV) of the stocks that are present in the fund. Thus, an Exchange-Traded Fund is said to have qualities of both shares and mutual funds.

One of the main benefits of ETF is diversification. When an investor invests in a stock, he does not have a space to limit his risk. If the company fails to perform, the investor will make losses. Now, an ETF helps you to keep your finances spread over the equities of different companies. If one of the stocks performs poorly, other stocks might act to limit the risk exposure by performing well. If other assets perform exceptionally well, an investor would still be earning profits.

Exchange-Traded Funds vs Mutual Funds

Exchange-Traded FundsMutual Funds
Market orders can be placedMarket orders cannot be placed
Traded intra-day like stocksTraded at the end of the day
Generally, a lower expense ratio than
mutual funds
Generally, a higher expense ratio when
compared to ETFs

Common types of ETFs

Gold ETF - Gold is a commodity. This makes the ETF a commodity ETF. A gold ETF is based on gold prices and it invests in gold bullion. Purchasing shares in this ETF makes you a virtual owner of gold.

Equity ETF - As the names suggest, these ETFs invest in the shares of different companies to earn interest and reduce risk exposure.

Currency ETF - The main objective of a currency ETF is to reduce the exposure to foreign exchange (forex) currencies.

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