Exchange traded funds etfs
State Street Global Advisors launched the first exchange traded fund (ETF) SPDR's [Standard & Poor's Depository Receipts] in the year 1993. Since then these funds grown in popularity and also able to gather assets at a rapid pace.
What are Exchange Traded Funds:
Exchange Traded Funds are different from traditional mutual funds. The best and easy way to understand Exchange Traded Funds [ETF's] is to consider them as mutual funds that are traded like stocks. ETF's are open-ended mutual funds the units of which will be listed and traded in a stock exchange like shares. Any one having a valid depository & trading account can buy or sell the units of ETF's. The open ended feature of the ETF ensures that the market price of the units on the stock exchange reflects the net asset value of the fund fairly closely. These types of funds enjoy significant cost savings in serving unit holders.
Advantages of Exchange Traded Funds:
In addition to the traditional advantages of mutual funds ETF's has the advantage of trading in a stock exchange. The advantages of the ETF's are as follows:
- It offers a Professional Management with the services of a Fund Manager
- It gives affordable diversification
- Economy in fund management
- Daily Pricing Mechanism
ETF will have some additional advantages of being listed and traded in a stock exchange as follows:
- Unlike the regular mutual funds ETF's units can be traded at any time when the exchange is open for trading.
- There won't be any loads like mutual funds other than usual brokerage commission for buying and selling in the stock exchange.
- Investors can use different buying and selling strategies like stop loss orders, buy on margin or short selling. In some ETF's option trading is also available like shares.
- Substantial saving in fund management cost since the ETF does not need to hold cash in anticipation of redemptions. This is because units of ETF's are traded in the stock exchanges. Units can be bought when there are sellers and units can be sold only when there are buyers. This way the funds of ETF's stays always fully invested. These cost savings can be passed on to the investor's.
Conclusion:
Although ETF's has got so many advantages the only disadvantage is that all ETF's will be subject to commission/brokerage since the units can be bought or sold only through authorized stock brokers in a stock exchange. This will make ETF's un-attractive compared to 100% no-load mutual funds.
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