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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.
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.
There are various types of ETFs in India. The table below explains different types of ETFs available in India:
|
S. No. |
Type of ETF |
Definition |
|
1. |
Debt ETFs |
Debt exchange-traded fund is a type of investment fund that allows investors to get an exposure to a variety of debt securities. |
|
2. |
International ETFs |
These ETFs invest in foreign securities, such as stocks and bonds. |
|
3. |
Gold ETFs |
These ETFs allow investors to essentially invest in gold by tracking the domestic physical gold price. |
|
4. |
Silver ETFs |
They focus on investing in physical silver, silver futures, or mining stocks. |
|
5. |
Sector ETFs |
These investments focus on a specific industry sector, such as energy, healthcare, insurance, IT or pharma. |
|
6. |
Currency ETFs |
They track the value of a currency or group of several currencies. |
|
7. |
Real Estate Investment Trust ETF |
These ETFs allow investors to invest in a portfolio of real estate-related stocks. |
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.
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.
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.
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