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What Is ETF?

An ETF (Exchange-Traded Funds) is a financial tool that tracks an index and contains a variety of securities.

Deeper Definition

An Exchange Traded Fund or ETF is a fund that can be bought and sold on an exchange – like a stock. ETFs frequently have lower fees than other types of funds. ETFs vary in risk depending on the type, and they are stock ETFs, commodity ETFs, bond ETFs, international ETFs, and sector ETFs.

An ETF operates in the following manner: the fund provider owns the underlying assets, creates a fund to track their performance, and then sells shares in that fund to investors. Shareholders own a portion of an ETF but not the fund’s underlying assets. Nonetheless, ETF investors that track a stock index may receive lump dividend payments or reinvestments for the index’s constituent stocks. While ETFs are designed to track the value of an underlying asset or index – whether a commodity like gold or a basket of stocks. They both trade at prices determined by the market that usually differ from the asset. Furthermore, an ETF’s long-term return will differ from those of its underlying assets because of expenses.

There are numerous advantages to ETF along with many disadvantages. Some benefits include diversification, lower fees, immediately reinvested dividends, limited capital gains tax, and lower discount or premium in price. The disadvantages are lower dividend yields, higher costs of stocks at times, and lots more. People who are interested in ETFs are advised to contact an online broker. An online broker is a person who acts as a middleman between a buyer and a seller of a financial instrument for a fee or commission; they facilitate the purchase/sale. Because of the technological advancements, traders and investors can now transact online through online brokers.

ETF Example

Chloe is in her late teens and seems to be wealthy beyond her friends’ imagination. Her way of spending on almost unnecessary things is getting alarming by the day; some of her friends get intimidated too. Her friends were forced to confront her to know the source of her wealth; that was when she narrated a story of how her father had invested in ETFs in her name since she was very young.

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