Investment Word of the Day: ETFs-What is exchange traded funds and how does it work? | Mint

Investment Word of the Day: A stock exchange -traded fund (ETF) is a combination of securities that provide diversification benefits of mutual funds with the ease of trading stocks. It works similarly to an index subject fund; The only main difference is that it can be purchased and sold on a stock exchange, just like individual stocks. Unlike mutual funds, which have a single closing price at the end of the trading day, the price of an ETF varies throughout the day as it is actively traded on the market. What is an ETF? A exchange traded fund (ETF) is a collection of different assets, such as stocks, bonds or other securities traded on stock exchanges. This allows investors to invest in many securities at the same time. If you buy an ETF, you invest in all the assets it has, which enables portfolio diversification. This is a popular tool among investors as it is easily considered trading, cost-effective, and that investors can invest in a wide range of assets without buying each security separately. These passive funds repeat the returns of a market index they are detecting. As these funds follow an index, their returns vary according to the specific index. How does ETF work? The assets that make ETFs are owned by a fund provider, which detects their performance and offers them accordingly to investors. The fund provider builds a basket with assets such as stocks, bonds, currencies and other securities. Similar to buying shares in the market, investors can own a share from the basket of securities and can be traded throughout the day. The price of an ETF share varies during the day based on the value of the securities. Types of ETFs here are some of the common types of ETFs. 1. ETFs for shares: It is mainly invested in a pool of company shares and detects the performance of a specific equity index. ETFs for shares traded similar to individual stocks on exchanges. 2. Bond ETFs: These funds are mainly about fixed-income instruments such as government bonds and debentures. 3. Commodity ETFs: These ETFs invest in pool commodities such as gold and silver. The price movement for this type of ETF is determined by the demand and supply of the commodity in the markets. 4. Sectoral ETF: These funds follow the performance of a specific sector, such as banking, real estate, IT, energy and others. 5. Index ETFs: They try to repeat the performance of a market index such as Sensex or Nifty 50. 6. Style ETFs: These funds monitor a specific investment style or market size, such as large cap value or small cap, instead of market indices. 7. International ETFs: These funds follow global markets such as the Nikkei index of Japan or the Hang Seng index of Hong Kong. ETFs are not an investment of one size pass, like any other option. It is necessary to evaluate it based on their features and individual investment goals. First published: 11 Apr 2025, 02:10 IST