Exchange Traded Funds (ETFs): Types and Features

  • Posted By :
  • Tuesday Apr 30, 2019

Types of ETFs :

  1. Equity Exchange Traded Funds

    Equity ETFs are simple investment products that combine the flexibility of stock investment and the simplicity of equity mutual funds. These are passive investment instruments based on indices and invest in securities in same proportion as the underlying index

  2. Fixed Income Exchange Traded Funds

    Debt ETFs allow investors to take an exposure to the fixed income securities such as bonds and bond ETFs. Along with providing an additional stream of income, bonds tend to reduce a portfolio's volatility. Debt ETFs can be traded on the cash market of NSE, and can be bought and sold continuously at market prices.

  3. Commodity Exchange Traded Funds

    Commodity ETF tracks price changes of particular commodities like gold or oil, and a Commodity stock ETF invests in the common shares of commodity producers. The former has little correlation with stocks, while the latter is highly correlated. If a portfolio already contains equities, a straight commodity ETF may make more sense

  4. International ETF

    International ETF invests in foreign based securities which are invested passively around an underlying index that may vary substantially from one fund manager to another.

Features of ETFs :

  • Intraday Trading - Since Exchange Traded Funds (ETFs) trade on stock exchanges, investors can buy and sell them during trading hours like regular stocks. They can be traded at market prices using different types of orders, which gives traders optimal pricing for their trades and the option of instant liquidity

  • Low Costs - ETFs typically have lower management fees and expenses than actively managed mutual funds investments

  • Diversification – ETFs ability to track an index to incorporate all or a representative sample of the securities that make up the index, gives an investor a diversified portfolio that may have lower variability compared to individual securities
  • Transparency – Portfolio and Price are the two transparency aspects of ETFs, as Index ETFs hold the same securities as the indexes they track, which enables investors to know precisely what they are invested in
  • Access to Niche Markets and Asset Classes – Investing in markets and asset classes, which were earlier difficult to access, like small emerging markets, commodities, currencies and alternative investments, is now possible due to the wide range of ETFs available for retail investors
  • Increased Choices for Portfolio Construction - Multiple investment themes and strategies available through ETFs gives investors multiple choices for portfolio construction
  • Potential Tax Efficiency – Because of lower portfolio turnover and in-kind redemptions, ETFs potentially have greater tax efficiency than mutual funds
  • Low Investment Threshold – Investors can construct diversified portfolios via ETFs with a low investment threshold
  • Elimination of Manager Risk – With the objective to track an index and not outperform it, manager risk is virtually eliminated in an ETF

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