scorecardresearchExplain Like I'm 5: What is an ETF?

Explain Like I'm 5: What is an ETF?

Updated: 20 Apr 2022, 12:20 PM IST

An Exchange Traded Fund (ETF) is a collection of assets that trade in small tradable units on the stock exchange just like a stock. They are considered as a blend of mutual funds and conventional stocks. We explain more on this here

An ETF is a basket of securities that are traded on the stock exchanges.

An ETF is a basket of securities that are traded on the stock exchanges.

An Exchange Traded Fund (ETF) is a combination of securities that trade on the stock exchange in small tradeable units just as a stock. The first-time investors see them as experimental investment options since they carry little risk because of a diversified portfolio.

Exchange Traded Funds are seen as attractive investment bets given their low cost, stock-like features as well as the tax exemption which some categories of ETFs offer.

Exchange Traded Funds are considered a blend of a stock and a mutual fund. ETFs can be sold and purchased just like any other stock in the stock exchange market.

Anyhow, they are similar to a mutual fund since they are constituted by the pooling of multiple financial resources such as shares, commodities, bonds and derivatives — just as a mutual fund. In addition, ETFs can be bought or sold through authorised brokers. But ETFs require passive management from the brokers.

There are several advantages of Exchange Traded Funds - First, ETFs are considered to be quite cost efficient. Second, they allow the investors to create a diversified portfolio for themselves. Third, ETFs allow the investors to enjoy tax exemption when traded in large volumes. Lastly, ETFs can be traded anytime during the day when the market is open. In other words, the trading can continue throughout the day.

In India, there are six categories into which ETFs are broadly divided - Index ETFs, Gold ETFs, Sector ETFs, Bond ETFs, Currency ETFs and Global Index ETFs.

One of the examples of an ETF can be HDFC Sensex ETF, which is among the top Index ETFs of India.

After procuring a good knowledge of ETFs, one should know as to how to buy and sell the ETFs. Following that, below are the steps for the same.

  • First set up an account with a brokerage service of your choice.
  • The next is to carry out a thorough research and decide on which fund to invest in.
  • Moreover, there are certain limit orders in an ETF to aid the investors in pre-determining the price points. The brokerage service that an investor has registered with can advise on this.
  • Right after this, the order has to be submitted and the trading gets initiated.

To summarise, Exchange Traded Funds (ETFs) trade like stocks in the stock market that carry some of the features of mutual funds.

ETF vs Index funds
First Published: 20 Apr 2022, 12:18 PM IST