ETF Full Form, Types, Benefits & Risks

• Home
• /
• Knowledge Base
• /
• Post
• /
• Finance
• /
• ETF Full Form, Types, Benefits & Risks

ETF Full Form, Types, Benefits & Risks

An ETF is a very popular form of investment. You can purchase and trade ETFs on stock exchanges, like Bombay Stock Exchange and National Stock Exchange, just like individual stocks. If you are an investor, you must understand what an ETF’s full form is, the benefits of ETF, and its types. 

What is the Full Form of ETF?

ETF’s full form is Exchange Traded Fund. An exchange traded fund is an investment fund that is traded on exchanges just like stocks. It is made up of a basket of securities that contains stocks, bonds or commodities, and is designed to track a specific market index or sector’s performance.

The late 1980s and early 1990s saw the development of exchange traded funds. After the first ETF ever was introduced in Canada in 1990, the concept quickly expanded to the US and other nations. The SPDR S&P 500 ETF (SPY), which debuted in 1993, was the first ETF in the United States of America (USA). 

In 2002, Nippon India Mutual Fund (formerly Benchmark Asset Management Company Ltd) introduced the first exchange-traded fund (ETF) on the Nifty 50 Index, marking the beginning of ETFs in India. Since then, ETFs have become incredibly popular and are now favored by both individual and institutional investors as an investment vehicle.

Types of ETFs in India

There are various types of ETFs in India. The table below explains different types of ETFs available in India:

Benefits of Investing in ETF

Investors often choose ETFs because of the several benefits they offer. Some of the benefits of ETFs are as follows:

• ETFs allow investors to diversify their portfolio efficiently without requiring them to choose individual stocks or bonds.

• They offer a broad selection since they cover most major asset classes and industries/sectors.

• International ETFs and industry-specific ETFs provide access to sectors where it may be challenging to purchase and sell individuals stocks/bonds.

• Exchange Traded Funds are quite versatile. They let you easily move your money between specific asset classes, such as stocks, bonds or commodities. 

• Since ETFs trade like stocks, you can trade them anytime during market hours. This is unlike mutual funds, which can only be traded at the end of the trading day based on their calculated net asset value (NAV). 

• Compared to actively managed funds, investing in an exchange-traded fund (ETF) is far easier. Analyzing prior performance, comprehending the fund manager's investment style (growth, value, etc.), or researching the fund's performance in rising and falling markets are not necessary. All you have to do is pick an index and invest in a low cost ETF that tracks it.  

• An ETF's reach is wider and its distribution costs are significantly lower because it is listed on an exchange. Investors benefit from these cost savings in the form of reduced expenses. The structure also helps in lowering processing fees.

• ETFs provide the ease of intra-day buying and selling on the Exchange to benefit from the current price, which is close to the actual NAV of the scheme at any given time, whereas redemptions of Index fund units occur at a fixed NAV price (often at the end of the day). 

• Some ETFs focus on volatile commodities, such as oil and natural gas, which can be considered risky due to their concentrated exposure to a single sector.

Risks Associated with ETF Investments

No investment is 100% risk-free. There are always certain risks associated with investments. Here are some risks associated with ETF investments:

• Exchange Traded Funds are susceptible to market fluctuations and the risks associated with the underlying assets they track. So, if the market goes down or the individual stocks within the ETF basket experience decline, the ETF’s value will decrease as well.

• If an ETF investment performed really well in the past, there is no guarantee that it’ll perform well in the future too. Various factors influence the financial market, such as economic conditions, interest rates, geopolitical events, and market sentiment. All these factors can change unpredictably. 

• If the stock market crashes, the investors who have made an investment in an ETF can lose their money. The extent of loss depends on the ETF type and the underlying assets it holds.

• In rare cases, the ETF may not accurately track the underlying index/asset’s performance.

Conclusion

Exchange Traded Funds allow investors to diversify their portfolios in a flexible, cost-efficient, and transparent way. Instead of having to purchase and sell individual stocks, investors can invest in ETFs containing a basket of various assets, such as stocks, bonds, or commodities. Like stocks, ETFs can be traded easily during market hours at market prices. This gives ETFs an edge over mutual funds, which can only be bought or sold at the end of the trading day when the Net Asset Value is calculated. However, like any other investment, ETFs carry certain risks. 

• 158 views