Exchange Traded Funds

What are Exchange Traded Funds?

ETFs represent shares of ownership in either fund, unit investment trusts, or depository receipts that hold portfolios of common stocks which closely track the performance and dividend yield of specific indexes, either broad market, sector or international. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks in a single security, as easily as buying or selling a share of stock. They offer a wide range of investment opportunities. While similar to an index mutual fund, ETFs differ from mutual funds in significant ways. Unlike Index mutual funds, ETFs are priced and can be bought and sold throughout the trading day. Furthermore, ETFs can be sold short and bought on margin.

Have you ever wished you could buy every stock represented in a high profile index such as the NSE Nifty, or the BSE Sensex but the cost of buying each stock represented in such an index was prohibitive?

Now, single securities, known as Exchange Traded Funds (ETF), can track the performance of a growing number of different index funds (currently the NSE Nifty). Most ETFs represent a portfolio of stocks designed to track one specific index. ETFs can be bought and sold exactly like a stock of an individual company during the entire trading day. Furthermore, they can be bought on margin, sold short or bought at limit prices. Exchange traded funds can help investors build a diversified portfolio that’s easy to track.
 

ETF Comparison - While similar to an index mutual fund, ETFs differ from mutual funds in significant ways.
Attribute	ETF	Index Mutual Fund	Individual Stock
Diversification	Yes	Yes	No
Traded throughout the day	Yes	No	Yes
Can be bought on margin	Yes	No	Yes
Can be sold short	Yes	No	Yes
Tracks an index or sector	Yes	Yes	No
Tax efficient as turnover is low	Yes	Possibly	No
Low Expense Ratio	Yes	Sometimes	Not a factor
Trade at any brokerage firm	Yes	No	Yes

EFTs trade like shares while providing the diversification of managed funds. Their performance closely tracks the investment returns of the shares making up the index.

Advantages

Trading Flexibility
One key advantage that ETFs have over traditional mutual funds is trading flexibility. ETFs trade throughout the day, so you can buy and sell them when you want.

Costs
In terms of the annual expenses charged to investors, ETFs are considerably less expensive than the vast majority of mutual funds.

Performance
Because they are shielded from investor trading, ETFs shouldn't suffer from having to keep cash on hand to meet redemptions, or from being forced to sell stocks into a declining market for the same purpose.

Conclusion
ETFs have a lot to offer. They're flexible and low-cost, and their underlying portfolios are protected from the impact of investor trading, making them more tax-efficient than most mutual funds. There are also ETFs that address specific subsectors that regular mutual funds do not.

Nevertheless, look carefully before you leap. ETFs' cost advantage isn't always as large as it might seem, and trading costs can quickly add up. Particularly if you're in the market for a fund that tracks a broad index such as the NSE Nifty, or if you wish to invest regular sums of money, it's tough to make a case yet for choosing an ETF over one of the existing low-cost mutual-fund options.

 Source : tradersedgeindia.com