Although both ETFs and mutual funds basically invest pooled investment in multiple securities such as stock, debt or commodities, there is always an element of misunderstanding for an investor while selecting one of the investment alternatives.The article is the ultimate beginner’s guide to understanding the ETFs.
What is ETF and how does it work?
An Exchange Traded Fund, or ETF, is a type of passively managed fund that aims to mimic the investments and return characteristics of an index.An equity exchange-traded fund (ETF) aggregates investor capital and allocates it to stocks of different companies.The ETF seeks to produce returns that are comparable to those of the index.
How to invest in etf
The fund provider owns the underlying assets. They create a fund to track the performance and provide investors shares in that fund.An ETF’s assets are not owned by shareholders; rather, they own a portion of it. Bulk dividend payments or reinvestments for the index’s member companies are possible for investors in an exchange-traded fund (ETF) that tracks a stock index.An ETF provider creates a basket of assets, each with a unique ticker, based on the universe of assets.The same process used to purchase company stock can be used by investors to purchase a share in that basket.The ETF is traded on an exchange by buyers and sellers throughout the day, just like stocks.
Types of etf
There are the following types of etf;
- Index fund: ETFs that track a particular index are known as index ETFs.
- ETFs for fixed income: These funds are made to offer exposure to almost all bond types. ETFs are made to give investors exposure to a particular industry, such oil, pharmaceuticals, or advanced technology.
- Commodity etf: These funds are intended to follow the price of a certain item, such corn, gold, or oil.
- Leverage etf: It is a feature of these funds that is intended to increase returns.
Features of the etf
There are the following features of an etf;
- Actively traded
- High liquidity
- Low expense ratio
