Investing in ETFs by AmyG

ETFs or Exchange traded funds are the type of investments which holds various assets like bonds, stocks and is traded at approximately the same price as the NAV of its composed assets during a trading day. ETFs are good investment vehicle for investors who are interested to diversify their portfolio, wish to go for tax efficiency, less costs and want to reap benefits similar to Stocks.

All sorts of investors, whether individual or institutional, sell ETFs. Simple reason being there high demand in market due to the advantage they offer. An investor need not buy a wide range of equities to create a portfolio mix; rather he can go for an ETF which is designed to provide him the range of exposure whether in a particular geography or an industry.  He may also choose a risk averse or risky investment style. He could also go on for choosing the value over growth or vice-versa.

The bouquet of securities in ETF doesn’t mean it can not be traded like stocks. It is, in fact, traded like stocks in an exchange and during a trading day it can be bought and sold like any other stock, with profit or loss. The ETFs are priced continuously like stocks with risk management and hedging options available to them as investors can attach futures and options contacts to them. ETFs are quite advantageous compared to mutual funds as there are no entry/exit cut associated with them. This is because an ETF simply represents the value of composed index and there is no need to actively manage them. In case of mutual funds, the fund manager manages the composition of stocks and hence there is high expense ratio associated while it is very low in ETFs. Another major advantage compared to Mutual Funds is that full visibility of stock composition to the investor is available in case of an ETF. Mutual funds publish the composition on a periodic basis depending on fund manager’s prudence.

Though there are quite a few advantages of ETFs, there are few drawbacks which must be kept in mind before investing, like large investors should look for an actively managed mutual fund in situations where the underlying index for the ETF may not be actively traded. One more aspect is to ensure that investor is aware of the investment he wishes to make in ETFs and the kind of benefits he expects. Any expectation created on someone else’s success in ETF may not create the right expectations and give the correct results.