What is an ETF
ETF stands for exchange traded funds. These are investment funds traded in stock exchanges similar to stocks. ETFs are popular due to their low costs and features similar to stocks. They experience price changes throughout the day. It is possible to buy even a single unit of ETF. These are available in US since 1993.
ETF consists of stocks, commodities, funds and is traded close to the net asset value of its components. ETFs are usually exchanged in-kind with the group of other securities of similar nature. These have the valuation features of mutual funds and tradable features of close-ended funds.
ETFs are categorized into index ETFs, Bond ETFs and commodity ETFs. Most common ETF popular these days are gold ETF. Gold trading is governed by a commodity index. A single unit of god ETF is equivalent to the price of 1g of gold.
Index ETFs replicate the performance of exchange they follow. They act more like index mutual funds but unlike mutual funds which can be redeemed only at NAV fixed for the day; these can be bought and sold throughout the day at changed prices. Investors can invest in a variety of securities through a single ETF.
Commodity ETFs invest in commodities like agricultural products, oils (natural resources) and precious metals. Commodity ETFs are gaining popularity because it gives chance to the investors to invest in commodities and futures without going through the pain of understanding the working of these investment products. Gold is the best option in falling economy. This can be used for hedging as it is sure to give unbelievable returns to the investor.
Bond ETFs invest in bonds. These are a reasonable investing option as these attract very low commissions but its trading should be avoided through third party; this being a costly option involving hefty fee. These are also a safe option in recessing economy. Money can safely be directed to government bonds and losses can be made up on choosing this type of ETF.
ETF can be called Fund of Funds as a group of fund types can be accessed through single ETF. The new concept in ETF is currency ETF. Euro Currency Trust launched the first currency ETF. These ETFS are pure return products where investors gain from fluctuation in currency rates.
Most popular type of ETF is recently launched Actively Managed ETF. These ETFs are fully transparent. Portfolios are daily published on their websites. They are stealing the market of actively managed mutual funds. These ETFs are exposed to the risk of illegal practice of front running which may reduce the profit margin.
Leveraged ETF is another ETF that amplifies the returns by using financial derivatives. These ETFs perform as per the pattern of daily activity of underlying exchange.