What all you need to know about ETFs (Exchange Traded Funds)
As you might have heard a lot about ETFs as Exchange-traded funds have become increasingly popular in recent years as investors seek to diversify their portfolios and gain exposure to a wide range of asset classes. In this article, we’ll explore what Exchange-traded funds are, how they work, and some of the top Exchange-traded funds of US and India based on performance and popularity.
What are ETFs?
An Exchange-traded fund is a type of investment fund that is traded on an exchange like a stock. Exchange-traded funds hold a basket of underlying assets, which could be stocks, bonds, commodities, or other types of securities. When you invest in an Exchange-traded funds, you’re essentially buying a piece of that basket of assets, giving you exposure to a diversified range of investments in a single trade.
One of the key benefits of Exchange-traded funds is their low fees. Because Exchange-traded funds are passively managed, meaning they simply track an underlying index or basket of securities, their expenses are generally lower than actively managed mutual funds. This can result in higher returns for investors over the long term.
How do ETFs work?
Exchange-traded funds are created and managed by financial institutions known as Exchange-traded funds providers. These providers purchase the underlying assets that make up the Exchange-traded funds basket and issue shares of the ETF to investors. The price of each share is determined by the net asset value (NAV) of the underlying assets.
Exchange-traded funds can be traded throughout the trading day on an exchange, which means that investors can buy and sell shares at any time during market hours. This makes Exchange-traded funds more liquid than many other types of investments, which can only be traded at certain times or under certain conditions.
Benefits of Investing in ETFs
The advantages of Exchange-traded funds are following:
- Simple to trade – Unlike other mutual funds, which trade at the end of the day, you could buy and sell at any time of day.
- Transparency – The majority of Exchange-traded funds are required to report their holdings on a daily basis.
- Exchange-traded funds are more tax efficient than actively managed mutual funds because they generate less capital gain distributions.
- Trading transactions – Since they are traded like stocks, investors can place order types (e.g., limit orders or stop-loss orders) that mutual funds cannot.
Risks of ETFs
However, there are several disadvantages of using Exchange-traded funds, which include the following-
- Trading costs: If you invest modest sums frequently, dealing directly with a fund company in a no-load fund may be less expensive.
- Illiquidity: Some lightly traded Exchange-traded funds have huge bid or ask spreads, which means you’ll be buying at the spread’s high price and selling at the spread’s low price.
- While Exchange-traded funds often mirror their underlying index pretty closely, technical difficulties might cause variances.
- Settlement dates: Exchange-traded funds sales will not be settled for two days after the transaction; this implies that, as the seller, your money from an Exchange-traded funds sale is theoretically unavailable to reinvest for two days.
Top Exchange-traded funds of United States
There are thousands of Exchange-traded funds available on the market today, covering a wide range of asset classes and investment strategies. Here are some of the top ETFs of US to consider:
1. SPDR S&P 500 ETF Trust (SPY) – This Exchange-traded fund tracks the performance of the S&P 500 index, which is made up of 500 large-cap U.S. stocks. It is one of the most widely traded and popular Exchange-traded funds on the market.
2. Vanguard Total Stock Market (VTI) – This Exchange-traded fund tracks the performance of the entire U.S. equity market, including large-cap, mid-cap, and small-cap stocks.
3. iShares Core U.S. Aggregate Bond (AGG) – This Exchange-traded fund tracks the performance of the U.S. investment-grade bond market, including government and corporate bonds.
4. Invesco QQQ Trust (QQQ) – This Exchange-traded fund tracks the performance of the Nasdaq 100 index, which is made up of 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
5. Vanguard FTSE Developed Markets (VEA) – This Exchange-traded fund tracks the performance of developed market stocks outside the U.S., including Europe, Japan, and Australia.
Top Exchange-traded funds of India
Here are some of the top ETFs in India, based on their performance and popularity:
1. Nifty 50– This Exchange-traded fund tracks the Nifty 50 Index, which represents the top 50 companies listed on the National Stock Exchange (NSE) of India.
2. BSE Sensex – This Exchange-traded fund tracks the BSE Sensex Index, which represents the top 30 companies listed on the Bombay Stock Exchange (BSE) of India.
3. Nippon India Gold BeES – This Exchange-traded fund invests in physical gold and tracks the price of gold in the Indian market.
4. SBI Nifty Next 50 – This Exchange-traded fund tracks the Nifty Next 50 Index, which represents the top 50 companies listed on the NSE after the Nifty 50 companies.
5. ICICI Prudential Nifty Low Volatility – This Exchange-traded fund invests in stocks from the Nifty 50 Index that have low volatility and aims to provide stable returns with lower risk.
6. Kotak Nifty Bank – This Exchange-traded fund tracks the Nifty Bank Index, which represents the top banking and financial services companies listed on the NSE.
7. UTI Nifty Index Fund – This Exchange-traded fund tracks the Nifty 50 Index and aims to provide long-term capital appreciation to investors.
Conclusion
Exchange-traded funds can be a great way to diversify your portfolio and gain exposure to a wide range of assets at a low cost. By understanding how Exchange-traded funds work and researching the top Exchange-traded funds available on the market, you can make informed investment decisions that align with your long-term financial goals.
Also it’s very important to note that investing in Exchange-traded funds carries risks and investors should conduct their own research and seek professional advice before making any investment decisions.
You can have a good read on NSE website, click Exchange-traded funds
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