Common Financial Terms & Concepts

What is an ETF or Exchange Traded Funds? Meaning, Full form, Benefits

Know what is an ETF, its full form and meaning. Learn about the different types of exchange traded funds and their benefits to investors.

When broken down to the atoms, all investment strategies are based on reducing risk. Pooling of funds is no different, which attempts to reduce both systematic and residual risk. One such pool of funds is ETF that we will be discussing here.

What is ETF? Full Form

The full form of ETF is Exchange Traded Fund. Normally referred as acronym \ETF\, these are Exchange-traded funds that can traded on a stock exchange like stocks. They simply offer you the best attributes of both stocks and benefits of mutual funds too.

Exchange Traded Fund: Meaning

An Exchange Traded Fund is similar to both derivatives and mutual funds, in a lot of ways. The first aspect being that an ETF derives its value from a basket of underlying securities, often tracking an underlying index. Also, an ETF is often listed on exchanges, and can be traded throughout the day, unlike its counterpart Mutual Fund which is often traded only once after the markets close.

The idea of an ETF is basically to diversify risk, which is often the only method to reduce risk. The way an ETF does that is by basically spreading the risk across a variety of assets spanning across different companies and industries.

Effectively, this means that when you buy an ETF, every rupee is spread across the underlying index, and it is that index’s value that determines the value and growth of your investment in the ETF. Needless to say that the demand/supply effect on the security’s price is still present, but ultimately, that also depends on the aforementioned aspect.

ETF Example

For example, when you buy into a NIFTY ETF, every rupee spent is basically divided among the assets proportionately. In this instance, suppose you spend Rs 100. Those 100 rupees is spread across all the 50 companies in the index, Rs 10 in one company, Rs 15 in another, etc making 50 parts of that Rs 100. But there is no need for actually buying all these securities, the fund buys these and the said Rs 100 is invested in the fund, so sort of an indirect investment.

Types of ETFs:

There are two types of such exchange traded funds:

1. Passively Managed ETFs:

One type of ETF fund is passively managed, which means the fund just buys all the securities in the index dividing the money in a particular ratio.

2. Actively Managed ETFs:

The other type being actively managed, where the manager and employees are actively buying and selling securities to change the ratio of assets held, but the underlying idea remains the same.

Exchange Traded Fund: Benefits

Some of the advantages of ETFs are as follows:

1. Risk Diversification:

The first benefit is obviously diversification of risk, because if suppose one industry under performs, only that proportion of the investment sustains losses and the rest can still carry those losses and still earn a decent amount, effectively managing risk.

2. Cost Efficiency:

The second is lower costs, especially over other such pooling of funds. For example, mutual funds and hedge funds charge a high management fee for such services, of course their job entails more research because the actions are specific. Note that while actively managed ETFs have a little higher cost than passively managed ones, over a period of time, Warren Buffet points out, low cost ETFs always beat such funds’ return.

Ask your questions here

ETF is an investment instrument that tracks a group of securities from a particular asset class and performs according to it. It is managed by a Fund manager who makes sure that the ETF tracks the underlying asset accurately. ETFs are listed on the Stock Exchanges therefore one can buy & sell them within the market hours at their desired prices.

ETFs are investment instruments that are listed on stock exchanges that offer investors to get exposure to a variety of asset classes. ETFs can be of different types tracking a particular asset class like Index, Commodity, and a particular sector. There are some changes in an ETF that include the Expense ratio and some other fixed charges charged by brokers, SEBI, etc.

ETFs are a financial instrument made to track an underlying asset and provide similar returns based on the performance of the underlying. ETFs are listed on stock exchanges which make it easier to buy and sell at desired prices. ETFs are not only limited to stocks but cover a wide range of investment avenues like Commodities, Bonds, etc.

Exchange-Traded Funds or ETFs are an investment tool that tracks particular securities like Equity, Commodity, Bonds, etc. ETFs are available for many categories from which one can choose from. These are listed on Stock Exchanges (NSE & BSE) hence there is ample liquidity and one can easily buy and sell these at their desired price during market hours. Some ETFs available for investment in Indian markets are Equity ETFs, Debt ETFs, etc.

ETFs (Exchange Traded Funds) and Mutual Funds are similar investment vehicles that provide the investors various features. Both have their benefits and shortcomings. ETFs are a good option for passive investors who want to invest in a particular Index or Sector without much rebalancing. On the other hand, Mutual Funds are a better option for active investors who are more active with their investments. One can switch between funds according to their current strategies.