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Exchange-Traded Funds: What are they?

Exchange-Traded Funds (ETFs) are listed and traded on exchanges like stocks, pooling resources to purchase shares, bonds, and derivatives. They offer diversification benefits, spreading finances across different companies to limit risk exposure.

By Ajay Ajith1 min read
Exchange-Traded Funds: What are they?

Key takeaways

  • Exchange-Traded Funds or ETFs are listed and traded on exchanges like stocks.
  • The trading value of an ETF is based on the net asset value (NAV) of the stocks that are present in the fund.
  • One of the main benefits of ETF is diversification, which helps to keep finances spread over the equities of different companies.
  • ETFs allow market orders to be placed and are traded intra-day like stocks, generally having a lower expense ratio than mutual funds.
  • Common types of ETFs include Gold ETF, Equity ETF, and Currency ETF.

Exchange-Traded Funds or ETFs are listed and traded on exchanges like stocks. It is a fund that pools the financial resources of several people and uses it to purchase shares, bonds, derivatives, etc. The trading value of an ETF is based on the net asset value (NAV) of the stocks that are present in the fund. Thus, an Exchange-Traded Fund is said to have qualities of both shares and mutual funds.

One of the main benefits of ETF is diversification. When an investor invests in a stock, he does not have a space to limit his risk. If the company fails to perform, the investor will make losses. Now, an ETF helps you to keep your finances spread over the equities of different companies. If one of the stocks performs poorly, other stocks might act to limit the risk exposure by performing well. If other assets perform exceptionally well, an investor would still be earning profits.

Exchange-Traded Funds vs Mutual Funds

Exchange-Traded Funds

Mutual Funds

Market orders can be placed

Market orders cannot be placed

Traded intra-day like stocks

Traded at the end of the day

Generally, a lower expense ratio than
mutual funds

Generally, a higher expense ratio when
compared to ETFs

Common types of ETFs

Gold ETF - Gold is a commodity. This makes the ETF a commodity ETF. A gold ETF is based on gold prices and it invests in gold bullion. Purchasing shares in this ETF makes you a virtual owner of gold.

Equity ETF - As the names suggest, these ETFs invest in the shares of different companies to earn interest and reduce risk exposure.

Currency ETF - The main objective of a currency ETF is to reduce the exposure to foreign exchange (forex) currencies.

Frequently asked questions

What are Exchange-Traded Funds (ETFs)?

Exchange-Traded Funds or ETFs are listed and traded on exchanges like stocks, pooling the financial resources of several people to purchase shares, bonds, derivatives, etc.

What is the main benefit of an ETF?

One of the main benefits of an ETF is diversification, which helps to keep finances spread over the equities of different companies to limit risk exposure.

How do ETFs differ from mutual funds?

ETFs allow market orders to be placed and are traded intra-day like stocks, generally having a lower expense ratio, while mutual funds cannot place market orders, are traded at the end of the day, and generally have a higher expense ratio.

What are some common types of ETFs?

Common types of ETFs include Gold ETF, which is based on gold prices and invests in gold bullion; Equity ETF, which invests in shares of different companies; and Currency ETF, which aims to reduce exposure to foreign exchange currencies.

Written by

Ajay Ajith

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