I guess most of you must have heard about Index funds, which are generally floated by Mutual funds. Index funds has sole objective of providing same return to its investor as a benchmark index (like S&P CNX Nifty or Sensex). To do so they bundle up security in same proportion as in the benchmark index which they are tracking. Thus value of portfolio fluctuates with the market resulting in almost same return with market. Exchange traded funds are just like Index fund when it comes to formation of portfolio. But they differ on some important aspects. They first came into existence in the USA in 1993.
Definition: A fund that tracks an index, but can be traded like a stock. ETFs always bundle together the securities that are in an index. So we can say ETF are Index fund that trades on stock exchanges.
How it’s different from Index funds:
Trading: Investors has advantage to do anything with ETF that they do with normal stock. Short selling, margin trading etc. is allowed which is rare in case of Mutual funds.
Intra-day trading: ETFs are traded on stock exchanges so they can be bought and sold at any time during the day (unlike most mutual funds). Their price will fluctuate from moment to moment, just like any other stock's price. In case of Mutual fund they are generally traded on their last day’s Net Asset Value (NAV).
Operating and transaction costs: ETF is purchased through brokers so they attract brokerage fee unlike Mutual funds.
Definition: A fund that tracks an index, but can be traded like a stock. ETFs always bundle together the securities that are in an index. So we can say ETF are Index fund that trades on stock exchanges.
How it’s different from Index funds:
Trading: Investors has advantage to do anything with ETF that they do with normal stock. Short selling, margin trading etc. is allowed which is rare in case of Mutual funds.
Intra-day trading: ETFs are traded on stock exchanges so they can be bought and sold at any time during the day (unlike most mutual funds). Their price will fluctuate from moment to moment, just like any other stock's price. In case of Mutual fund they are generally traded on their last day’s Net Asset Value (NAV).
Operating and transaction costs: ETF is purchased through brokers so they attract brokerage fee unlike Mutual funds.
Next Post: ETF in India
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