Etf exchange traded funds explained?
ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.
In the simple terms, ETFs are funds that track indexes such as CNX Nifty or BSE Sensex, etc. When you buy shares/units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its native index.
An ETF, or Exchange Traded Fund is a simple and easy way to get access to investment markets. It is a pre-defined basket of bonds, stocks or commodities that we wrap into a fund and then we list onto the exchange so that everyone can use it.
Most ETFs are designed to reproduce the performance of an index. So the securities that an ETF buys will be the same as those found in the index that it tracks. For example, certain ETFs track the S&P 500 or the Barclays Capital U.S. Aggregate Bond Index. They have invested in the securities in those indexes.
Stocks represent a piece of ownership in a publicly traded company. ETFs are a bundle of assets and securities such as different stocks and bonds. A single ETF can contain dozens or hundreds of different stocks, or bonds or almost anything else considered an investable asset.
One of the ways that investors make money from exchange traded funds (ETFs) is through dividends that are paid to the ETF issuer and then paid on to their investors in proportion to the number of shares each holds.
However, there are disadvantages of ETFs. They come with fees, can stray from the value of their underlying asset, and (like any investment) come with risks.
At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business. Make sure you know what an ETF's current intraday value is as well as the market price of the shares before you buy.
Exchange-traded funds (ETFs) can be an excellent entry point into the stock market for new investors. They're cheap and typically carry lower risk than individual stocks since a single fund holds a diversified collection of investments.
Exchange-traded funds (ETFs) are ideal for beginning investors due to their many benefits, which include low expense ratios, instant diversification, and a multitude of investment choices. Unlike some mutual funds, they also tend to have low investing thresholds, so you don't have to be ultra-rich to get started.
What are the pros and cons of ETF?
ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts. There are drawbacks, however, including trading costs and learning complexities of the product.
Both can track indexes, but ETFs tend to be more cost-effective and liquid since they trade on exchanges like shares of stock. Mutual funds can offer active management and greater regulatory oversight at a higher cost and only allow transactions once daily.
ETFs generally hold a collection of stocks, bonds or other securities in one fund or have exposure to a single stock or bond through a single-security ETF.
Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.
Multiple securities held by the ETF portfolio provide diversification to investors. An investor has to pick many stocks to bring in diversification. ETFs are less riskier than stocks as they reduce risk by diversification across market securities.
Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in.
| Symbol | Name | Dividend Yield |
|---|---|---|
| OARK | YieldMax Innovation Option Income Strategy ETF | 47.97% |
| CONY | YieldMax COIN Option Income Strategy ETF | 38.79% |
| RATE | Global X Interest Rate Hedge ETF | 33.50% |
| MAXI | Simplify Bitcoin Strategy PLUS Income ETF | 30.20% |
Regular payouts for ET are paid quarterly.
| Symbol | Name | 5-Year Return |
|---|---|---|
| IYW | iShares U.S. Technology ETF | 25.47% |
| XSD | SPDR S&P Semiconductor ETF | 25.10% |
| FTEC | Fidelity MSCI Information Technology Index ETF | 24.30% |
| VGT | Vanguard Information Technology ETF | 24.15% |
Every time you add a single country fund you add political and liquidity risk. 4 If you buy into a leveraged ETF you are amplifying how much you can lose if the investment crashes. 1 You can also easily mess up your asset allocation with each additional trade that you make, thus increasing your overall market risk.
What happens when an ETF fails?
The liquidation of an ETF is similar to that of an investment company, except that the fund also notifies the exchange on which it trades, that trading will cease. Investors who want "out" of the fund upon notice of the liquidation sell their shares; the market maker will buy the shares and the shares will be redeemed.
Holding period:
If you hold ETF shares for one year or less, then gain is short-term capital gain. If you hold ETF shares for more than one year, then gain is long-term capital gain.
Since ETFs are traded on the stock exchange, they can be bought and sold at any time during market hours like a stock. This is known as 'real time pricing'. In contrast, mutual funds can be bought and redeemed only at the relevant NAV; the NAV is declared only once at the end of the day.
This longer-term underperformance results from ill-timed rebalancing and the geometric nature of returns compounding. The author uses the concept of a growth-optimized portfolio to show that highly levered ETFs (3x and inverse ETFs) are likely to converge to zero over longer time horizons.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
