What is an ETF

by Manshu on March 8, 2008

in Articles

What is an ETF?

ETF or Exchange Traded Fund is quite simply a mutual fund that itself trades in an exchange.

Typically mutual funds invest in stocks or other assets, but they themselves do not trade in any stock exchange. After trading hours are finished a mutual fund’s value is calculated based on the price of whatever stocks it held.

ETFs differ in the sense that they themselves are also traded on the exchange like other stocks and their value also keeps changing every instant the market is trading.

A popular reason for buying ETFs in place of mutual funds is the fact that an investor can keep a track of the ETF during market hours and when it touches a price that they like they can go ahead and buy it. Over the longer term ETFs can sometimes prove to be cheaper than mutual funds because typically they charge lesser annual fee and have no entry loads or exit loads. However because the method to buy ETFs is similar to stocks they do have a brokerage fee associated with them. This does not imply that you will make more money buying an ETF instead of mutual fund because that really depends on how much your mutual fund or ETF grows. This simply means it generally costs less to own an ETF than it would to own a mutual fund.

The philosophy of ETF is very similar to Index funds and it promotes diversifying risk by holding a bucket of stocks having a common feature and taking advantage of growth in that particular sector, region etc.

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