ETFs are a financial instrument made to track an underlying asset and provide similar returns based on the performance of the underlying. ETFs are listed on stock exchanges which make it easier to buy and sell at desired prices. ETFs are not only limited to stocks but cover a wide range of investment avenues like Commodities, Bonds, etc.
What is an ETF?
An ETF or an Exchange Traded Fund or a Fund that tracks a particular asset such as an index, commodity, sector, etc. It is managed by a Fund manager who makes sure that the ETF is accurately tracking the underlying asset, which can consist of Stocks, Commodities, Index, etc. ETFs are listed on stock exchanges hence an individual can buy and sell an ETF on the Stock exchange at any point of time during the market hours i.e (9:15 to 3:30).
Are ETFs only for Stocks?
In short No! ETFs are not limited to stocks or Indices. They can be widely diversified to various asset classes like Debt, commodity, Bonds, etc. Let’s look at some of the types of ETFs available in India.
- Index ETF- Index ETFs are funds that track particular Indices, for example, Nifty50 Index, Nifty Mid Cap Index, etc. These are mainly equity-focused ETFs that track the real-time movement of such Indexes.
- Commodity ETFs- Commodity ETFs include ETFs that track an underlying commodity for example Gold, Silver, Aluminium, etc. SBI GoldETF is an example of a Commodity ETF.
- Debt ETF- Debt ETF does not contain any equity component in them. It is focused on Debt instruments like Government Securities, Bonds, etc. The underlying asset in these ETFs is Government Bonds, Treasury bills. These provide a fixed rate of return and the probability of capital gain is very small in these ETFs. Bharat Bond is an example of a Debt ETF.
- International ETFs- International ETFs are another equity-related ETF that is common in India as it gives exposure to foreign markets. International ETFs usually track Foreign Indices such as NASDAQ 100 or S&P 500. The main advantage of buying an international ETF is, one does not need to maintain a separate brokerage account with any foreign broker to buy international shares. Motilal Oswal NASDAQ 100 ETF is an example of an International ETF listed on the NSE & BSE.
Conclusion
By now it should be clear that ETFs can be of various types tracking numerous asset classes. ETFs provide a range of options for the investor to choose from. The charges on ETFs is also low as there are no heavy overhead expenses like salaries, high transaction charges, etc. This is due to the fact that most ETFs are passively managed funds that track the underlying asset.