WHAT IS AN EXCHANGE-TRADED FUND? As the name suggests, it is a fund, but it can be traded on an exchange like a stock. Simply put, an ETF is a basket of securities like any other mutual fund, but it is tradable, meaning it can be bought or sold like a stock. So, you own a portion of the fund, but not the underlying securities that the fund contains.
An ETF typically tracks an index, bond, commodity, or index fund. While most ETFs are passive, like an index fund, and some are actively managed, ETFs can be of various types depending on the securities they hold, such as equity, Fixed incomecommodities and sectors, among others. ETFs are usually cheaper than buying individual stocks and are more liquid than mutual funds.Advantages and disadvantages of investing in ETFs Benefits Lower cost: Since most ETFs are passive, the operating costs are lower. The brokerage fee will also be lower compared to buying and selling individual stocks. Liquidity: Unlike a regular mutual fund, an ETF can be traded at any time during trading hours. Less risk and effort: It is easier to achieve the required asset allocation due to the diversity of assets in a single fund. If the ETF tracks an index, it eliminates unsystematic risk and minimal effort is needed to achieve market-linked returns over the long term.Disadvantages Without superior performance:Since most ETFs track indices and are not actively managed, returns are aligned with the indices and there is little opportunity for higher returns. Illiquidity: In thinly traded ETFs, it can be difficult to sell a fund and liquidity can become an issue when the money is needed. Tracking error: An ETF may deviate from its benchmark for a variety of reasons, resulting in performance that is not aligned with the index.
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