What is Exchange-Traded Funds [ETFs]?

By : Neha Dhyani

Updated : Jun 14, 2022, 17:00

Exchange-Traded Funds [ETFs] are an investment option that works much like mutual funds. They are bought and sold on stock exchanges like shares. Generally, ETFs represent specific sectors, commodities, indexes, or other assets.

They can contain different types of investments including bonds, stocks, and commodities. Their prices keep changing through the day as investors buy and sell them; this makes them different from mutual funds that are traded only after the market closes.

India's First Corporate Exchange-Traded Funds [ETFs]

The government of India introduced the nation's first corporate Exchange-Traded Funds [ETFs] in 2019. Bharat Bond Fund is a group of AAA-rated bonds issued by the Central Public Sector Enterprises. This ETF tracks an index created by the National Stock Exchange.

The fund will make investments in the bonds of entities run by the states and the government. The unit size of the fund is Rs. 1000, giving a chance to retail investors to participate.

Features and Benefits of Exchange-Traded Funds [ETFs]

Exchange-Traded Funds [ETFs] are marketable securities which means they have prices like shares to buy and sell throughout the day on exchanges. ETFs hold multiple underlying assets instead of only one like a stock. This makes them a great choice for investors who look for diversification of their portfolios.

An Exchange-Traded Funds [ETFs] can comprise hundreds of stocks across industries or can be limited to a single sector. These funds have higher liquidity as compared to mutual funds and are also more cost-effective.

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Passive Investing With Exchange-Traded Funds [ETFs]

Exchange-Traded Funds [ETFs] are generally traded passively where the manager doesn't pick the stocks. The fund simply tracks an index and tends to reflect its performance. This means ETFs allow investors to avoid the consequences of security selection by a fund manager.

The index providers select the stocks carefully and rebalance them at regular intervals. You just need to track the underlying index and consider small changes from time to time to the investment strategy to make sure it is always in line with the index.

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Exchange-Traded Funds [ETFs] can be bought through traditional brokers as well as online agencies. A brokerage account will allow you to trade ETFs just like stocks. A Robo-advisor is a great option for investors looking for a highly passive approach.

To conclude, Robo-advisors generally include Exchange-Traded Funds [ETFs] in portfolios though the investor may not be able to choose whether to focus on individual stocks or ETFs. Exchange-Traded Funds are, in short, similar to mutual funds and stocks but also distinct from both in some ways.

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FAQs on Exchange-Traded Funds [ETFs]

Q.1 What are liquid Exchange-Traded Funds [ETFs]?

Exchange-Traded Funds [ETFs] are those investing in short-term maturity instruments or government securities.

Q.2 What are international Exchange-Traded Funds [ETFs]?

Exchange-Traded Funds [ETFs] track an international index or market and make investments in securities based in other countries.

Q.3 What happens to the Exchange-Traded Funds [ETFs] dividends?

The dividends of Exchange-Traded Funds [ETFs] are generally reinvested into the fund.

Q.4 What are the popular options for Exchange-Traded Funds [ETFs] available to investors in India?

Some of the most popular types of Exchange-Traded Funds [ETFs] available in India include international ETF, gold ETF, commodity ETF, equity ETF, and debt ETF.