Exchange Traded Fund (ETF)

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Exchange Traded Fund (ETF)

An exchange traded fund (ETF) is a marketable security that trades like a stock on the stock exchange. Just like a stock the prices fluctuate during a trading day. It is essentially a portfolio of securities from a specific sector or region e.g. equity, fixed income, commodities etc. An ETF tracks a marketable security such as an index, bonds, commodity or an index fund (index fund is like a basket of assets).

Owning an ETF does not directly mean that you own the asset or have any direct claim but rather, you indirectly own the underlying asset. You are entitled to a portion of the profit such as interests and dividend paid, but you do not own the underlying asset.

Advantages of ETF’s

Accessibility

There are thousands of ETF’s available, so you can access a broad range of markets easily, they pretty much readily available for you to buy.

Diversification

ETF’s gives you the benefit of diversification like an index fund. Diversification is a process of reducing the risk or exposure experienced by owning just one type of asset. Therefore, investing in a variety of assets gives you a safety net. ETF gives that safety net because it’s a fund consisting of a variety of assets.

Transparency

Most ETF’s show their holdings on a daily basis. Investors are able to see the holdings contained in the particular ETF they hold

Cost effectiveness

ETF investors can purchase as little as one share and there is no minimum deposit required. You pay same commission to the broker like any regular order unlike mutual funds which will cost more.

Liquidity

The ability to buy and sell ETF shares on the stock exchange during trading hours means that you can easily turn your shares into cash.

Interested in ETF’s?

Here are some of the widely traded ETF’s

Spider (SPDR) – tracks the S&P 500

IWN – tracks the Russell 2000 index

OIH – tracks oil companies……. etc

Reference

Image – http://www.fool.com

investopedia.com

bloomberg.com