About ETFs

• An Exchange-Traded Fund (ETF) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets.
  • In simple terms, ETFs are funds that track indexes such as Nifty, Sensex, etc. When one buys shares/units of an ETF, they are buying shares/units of a portfolio that tracks the yield and return of its native index. 
• ETFs are in many ways similar to mutual funds; however, they are listed and traded on stock exchanges like a common stock. 
  • The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange. 

Advantages:

• One of the primary uses of ETFs is to take exposure to a particular market or a segment of it. Eg: One can participate in the Indian stock markets by simply buying the units of an index that tracks a broader market index like the BSE 500 or Nifty 500. 
  • Similarly, one can participate in the Indian banking sector by buying units of an ETF that tracks the banking sector index.
• ETFs typically have lower fees than mutual fund schemes, making them an attractive alternative for individual investors.

Passive Management:

• ETFs are passively managed. The purpose of an ETF is to match a particular market index, leading to a fund management style known as passive management. 
  • Passive management is the chief distinguishing feature of ETFs. Essentially, passive management means the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. 
  • An investor in an ETF do not want fund managers to manage their money i.e., decide which stocks to buy/sell/ hold, but simply want the returns to mimic those from the benchmark index. 
• This is quite different from an actively managed fund, like most mutual funds, where the fund manager ‘actively’ manages the fund and continually trades assets in an effort to outperform the market.