An exchange-traded fund is an investment fund traded in the stock exchange, much like stocks. It holds assets like stocks, commodities, or bonds and the mechanism designed to operate it keeps it close to its net asset value, but there are deviations occasionally.
An ETF is a bag of securities like stocks that tracks an underlying index, but it is marketable security since can be bought and sold due to its price association. Basically, an ETF owns underlying assets and those assets are divided into shares for the division of ownership. This, an ETF can own hundreds and thousands of stocks of various industries or could just stick to one particular industry or sector. For instance, a Banking ETF would have stocks of all banks in the industry.
What are the advantages of buying an ETF?
Buying an ETF gives an investor access to Kant stocks across various industries and it also saves a lot of expense when compared to buying individual stocks, as it benefits in the broker commission. It is also a great way to tackle risk management by diversifying into various stocks, securities, and sectors. ETFs not only benefit the investors by providing the ability to gain as stock prices rise and fall, but it also yields benefits from the company paying the dividends, as the shareholders are entitled to a proportion of profits when the fund is liquidated. And another important thing about this is, they are more tax efficient than mutual funds since it based on the exchange more than redemption that helps keep the tax costs lower and no tax liability is triggered as such.
What are the disadvantages of Buying an ETF?
Along with their set of Pros, ETFs have a few cons that cannot be disregarded. Some ETFs have managed actively and that leads to higher fees as compared to the passively managed funds that track an index. Not all ETFs are diversified, most of the times funds might focus on only a few stocks or one industry. Then there are ETFs with low trading volumes that stop the investors from buying and selling shared easily.
Important tips to consider while buying the ETF
Buying an ETF is like buying equity. But there are things that you must know before making a purchase,
You should be clear about why do you want to purchase an ETF do you want broad market exposure, do you want to invest in a specific industry? It’s very important to determine the correct investment strategy, which will help you pick the most effective ETF. You have lots of options from general market and index funds to a specific sector or region funds or even commodity funds, if you go by a strategy you will definitely find an ETF that fits with it. Other than that you should know the term period that you want to hold for your ETF, whether it’s a long term investment or short term investment, brings out many advantages and disadvantages that you need to know. Another crucial aspect is to research about the ETF very well, not just market exposure, or country exposure but you should always examine the equity and scrutinize the stock really well before carrying on with it.