Basics of Exchange Traded Funds


Commonly,  investors trade in stocks on stock exchanges. There is another equally exciting and beneficial investment option which can be traded just like stocks on the exchanges, these are known as exchange traded funds or ETF. In this article hence we will explain the basic of ETF investment:Basics of Exchange Traded Funds

Exchange traded funds are index funds which holds assets such as stocks or bonds and trade on the stock exchanges. Just like stocks ETF hence are considered the quickest and simplest method to trade on stock exchanges by focusing mainly on the asset allocation. ETF trades with the same net asset value of the underlying assets to which it belongs during any trading day. Examples of stock indices with ETF’s include S&P 500, Dow Jones Industrial Average and Russell 1000 or 2000 etc.

Why should you invest in ETF? Because of their common benefits such as been a low cost vehicle (annual fees is approximately .09%), helps in diversification, highly flexible in buying & selling, tax efficient and the fact that they are very similar to stocks, which is known to every investor.

Moreover they are omnipresent, if you pick any asset class you will find an ETF there. Exchange traded funds are available for almost all American companies, large ones or small ones, real estate trusts, bonds, foreign stocks and last but certainly not the least- gold too. Just like ETF’s are a low cost buy they also can be maintained over the long run, and thus any long time holding investor can find it attractive. Just like stock certificates give you security, ETF also is safe and secure instrument.

Difference between ETF’s and Mutual Funds: Difference lies in their trading strategies, for mutual funds which do not trade mid day, transactions get completed after the closing hours of the market whereas orders are taken during the trading time. More so, mutual fund price is dependent on the closing prices of all types of stocks included in the fund.

Whereas for exchange traded funds, things are quite different as like stocks they trade during the entire trading hours of the market and investors get the benefit (just like stocks) to lock in their price. Apart from the above difference, ETF’s internal structure is usually more complex than any mutual fund, but a common investor need not worry due to the help provided by their brokers, managers etc to make it simple. Also ETF’s unlike mutual funds do not have any 12b-1 fees (associated with advertising & fund promotion).

Some of the popular Exchange traded funds are part of:  S&P 500 index, Nasdaq 100, DIAMONDS (Dow Jones), Russell 2000, MSCI EAFE, VIPERs (Vanguard’s) etc.

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