A Complete Overview of Exchange Traded Funds

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ETFs have presented an incredible new panorama of investment opportunities to Institutional Money Managers and Retail. We see that Exchange Traded Funds have grabbed the attention of investors worldwide. ETFs are the Index Funds that are mentioned on the exchanges just like the stocks. With ETFs, the investors can have wide exposure to all the stock markets even from foreign countries. They can even explore the specific industries or sectors effortlessly. Essentially, an ETF is a bunch of stocks that includes Index funds. The trading value of the ETFs depends on the NAV of the underlying stocks that are included in the bunch. In simple terms,  ETFs are the mutual funds that the investors can buy/sell at real-time prices.

In this post, we are going to learn different types of Exchange Traded Funds and how to buy/sell them. But before that let’s explore some of the advantages of investing in ETFs.

What are the Different Types of ETFs?

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Various ETFs are designed to serve different purposes. Some are used as a means to offset the risk partly in an investor’s portfolio, speculation, income generation and price increments.

Here are some of the types of ETFs that are popular.

Industry ETFs

Industry ETFs are based on a specific industry – banking, gas, oil, technology etc.

Currency ETFs

These ETFs track foreign currencies like the Australian dollar, Euro, Canadian dollar, etc.

Inverse ETFs

Under these ETFs, the investments are made in an attempt to make profits from shorting stocks. The stocks that are expected to decline in value are sold and then repurchased at lower prices to earn gains. Investors must understand that many ETNs (Exchange Traded Notes) are falsely advertised as inverse ETFs. They are not ETFs in the true sense.

Bond ETFs

They invest in corporate bonds, government bonds, local and state bonds.

Commodity ETFs

They invest in crude oil commodities, gold commodities and other commodities.

Also, Check – Why Stock Market Education Is Important For Beginners?

What are the Advantages of ETFs?

  • ETFs, give good exposure to a bunch of securities or to an index and trade like a single stock. When compared to the traditional open-ended index funds, there are numerous advantages of investing in Exchange Traded Funds. Here are some of the benefits of ETFs.
  • ETFs provide lots of flexibility to the investors. Investors can track the funds closely whenever they want. They can also sell/buy the funds throughout the day.
  • ETFs are of low cost when compared to open-ended traditional index funds.
  • Unlike Index funds, which redeem at the end of the day fixed price, ETFs provide investors with the freedom to do an intra-day sale to earn gains on the prevailing price.
  • As there is no extra transaction cost for selling or buying, ETFs do not incur the loss to long-term investors from the frequent outflows and inflows of short-term investors.
  • As ETFs are super flexible, they are a great means to provide quick exposure to equity marketers, futures markets, or equalizing cash.
  • The scope of tracking errors in ETFs is minimal when compared to the regular index funds. Tracking error occurs when there is a gap between the underlying index and Net Asset Value (NAV) of the ETF.
  • The reach of ETFs is wider as they come at a lower cost when compared to regular funds. As they are listed on the ETFs, the investors can get them at lower costs. Even the processing charges, collection, and disbursement charges are lower when compared to traditional funds.

How to Buy and Sell Exchange Traded Funds?

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Buying and selling ETFs is really simple. Here are the instructions to follow if you are a beginner in investing.

  1. You have to choose the fund you would like to invest in after doing some research.
  2. Pick an online brokerage service and set-up an account with them.
  3. Online brokers offer a good number of choices. Choose the symbol or logo of the funds you want to invest in. Enter the number of shares you want to buy.
  4. There are three kinds of orders – market orders, stop orders, and limit orders. Select an order based on your preference. Submit the order after setting all your conditions. You’ll receive an order update once the trade is completed.

Wrapping Up:

Exchange-Traded Funds are essentially funds that are listed on the stock market. The best thing about ETFs is they provide great exposure to the whole stock market. They are highly flexible and have a low cost. Overall, ETFs are a good investment and every investor should consider allocating a part of their savings to them.

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