What is Exchange Traded Fund (ETF)?

An exchange traded fund,or ETF, is a cluster of different securities merged together in a single fund that is traded on the stock exchange. Most ETFs track a benchmark or an index and try to replicate its performance, making it easier for an investor to buy or sell their shares of an ETF through a broker. ETFs trade at the stock exchange much like the price of other stocks.

Objective of ETF

The objective of an ETF is to offer an array of investment strategies at low cost and is not limited to stocks. An investor can invest in bonds, commodities, derivatives or a mix of securities therefore providing diversification to build a customised investment portfolio according to financial goals at low cost than most of the other offerings.

As it is known for its diversification and can be traded on the stock exchange, ETFs ensure swift trading options based on market views and rapid development in global events.

ETFs allow minimal investment that can help beginner investors to invest with a small investment.

Difference between ETF and Mutual Fund?

• Due to their similar characteristics, both represent a basket of securities or bonds, an ETF or Mutual Fund can be taken for being the same but offers different features. Most notable is that an ETF, similar to stocks, can be traded throughout the trading day soon after the exchange opens while a Mutual Fund can be bought or sold only after the market closes for the day.
• Further, an ETF can be more tax efficient as an investor has to pay taxes only when they sell their shares whereas, in a Mutual Fund, the investor has to pay tax as long as they have holdings. Most ETFs are also index-based that translates to lower turnover than active funds leading to fewer chances of facing capital gains distributions.
• An ETF incurs a lower fee as it is passively managed by a manager compared to a Mutual Fund, which has to be actively managed, thus the fee increases.