In case of stock markets, there are many ways of investing money into stock markets like direct equity investment where investor himself or herself invest money into the stocks market or investing through mutual funds where investors do not invest directly into markets but indirectly through mutual funds houses. ETF is another way of investing money into stock markets, full form of ETF is exchange traded fund and it refers to that investment product which replicates an index that index can be NASDAQ or Dow Jones or DAX and so on. In order to understand more about this concept, one should look at some of the important features of ETF –
Characteristics of Exchange Traded Fund
Diversification
The first and foremost feature of exchange traded fund is that it helps the investor in investing money in a diversified portfolio as exchange traded fund invests money in the same proportion as the weight of the stock in a representative index. Hence of example suppose in case of NASDAQ index the weight of Microsoft is 5 percent and weigh of IBM stock is 3 percent than exchange traded fund will invest 5 percent of the total corpus in Microsoft and 3 percent of total corpus in IBM
Lower Costs
In case of mutual funds, the mutual fund manager regularly buys and sells stocks which in turn increases the turnover cost and brokerage but as far as exchange traded fund is concerned they are passively managed portfolios which in turn results in lower costs for investors as compared to mutual funds investment.
Choice to Investor
Exchange traded funds offer investors a wide range of choices in terms of sectors like there are different ETFs for information technology or for FMCG or for infrastructure companies and so on besides for investors looking to invest into other markets there are exchange traded funds for different geographies also like emerging markets fund or developed markets fund and so on.
Transparency
In case of mutual funds, the investor does not have any idea where his or her funds are getting invested but in case of exchange traded funds, there is that transparency factor because the investor knows where the funds are getting invested. Hence, for example, an energy ETF will invest funds into stocks of energy companies or infrastructure ETF will invest funds of investors into infrastructure companies and so on.
Liquidity
Exchange traded funds are quite liquid in the sense that investors can buy and sell them whenever they want and we all know that liquidity is one of the main pillars of investing because if your investment due to being illiquid cannot help you out in emergencies than there is no use of that investment but ETF ticks the box of liquidity as far as investor is concerned.
As one can see from the above that exchange traded funds have some unique characteristics and that is the reason why investors looking for different options other than the traditional method of investing should consider buying exchange traded funds in their portfolios.