Definition: The Exchange Traded Funds or ETF is the alternative investment fund that trade on the stock exchange very much like other stocks. These own the underlying assets such as shares of stocks, oil, futures, bonds, foreign currency, etc. and divide the ownership of these into shares which is then traded on the stock exchange.
The Exchange Traded Funds are hybrid in nature since it combines the features of the index fund. The price of these funds is linked to the underlying index, such as BSE and NSE. Unlike mutual funds, the ETFs are traded on the stock exchange and the prices are changed throughout the day as and when these are bought and sold.
Advantages of Exchange Traded Funds
- The Expense ratio (a cost incurred in operating the mutual fund) for these funds is relatively lower than the other broad market funds.
- ETF offers the diversification of index funds and at the same time offers the investor an opportunity to purchase on margin, sell short and purchase as little as one share.
- ETFs can be bought easily just like the other stocks by placing an order with the broker.
- There is a favorable taxation on the cash flows generated through the ETFs.
The exchange traded funds do not have the net asset value (NAV) which is calculated once at the end of every day (as in a case of the mutual funds), and thus, one can invest at the real time prices that exist at the end of the day. The ETFs can be purchased similarly like any other sock, i.e. by just placing an order with the broker. The investors are entitled to get the proportion of profits in the form of dividend or interest and might get the residual value in case the funds are liquidated.