The exchange-traded fund or commonly known as ETF is marketable security which tracks bonds, commodity, index, or basket of assets like an index fund. These funds are considered as one of the most important and also the valuable products for the investors. ETF offers numerous benefits and is an excellent investment tool which helps in achieving financial and investment goals. The value of ETF varies throughout the day as it is purchased and sold. The investors are drawn towards ETF as it has more liquidity as compared to other investment options.
However, there are many people who are not aware of what exactly is it and how it works. So, let us see what ETF is and how it works.
What is ETF?
Exchange traded funds are the securities which are same as index funds but then these can be bought and sold anytime in the day same as the common stocks. Investors can conveniently buy the broad security basket in a single transaction. One of the biggest advantages of ETF investment is that you get coverage to market segments and equities. The important part is that ETF can act like equity investment but with lower fees. It can track broad range of stocks.
How exchange traded funds work
When the stock exchanges are open, an ETF is bought and sold resembling a company stock during the day. Similarly like a stock, an ETF also has a ticker symbol and a day price data can be easily accessible during the track of the trading day.
However, the outstanding shares of an ETF can change on daily basis. It is because of continuous creation of new shares and also the withdrawal of existing shares keep taking place. Thus, the issue and redemption of shares which happen frequently keeps the market price of ETFs in a line. ETFs’ market price is maintained in line with the primary securities with the help of an ETF’s feature of issuing and redeeming shares regularly.
Though these are specially designed for individual investors, the main role players are institutional investors. They help in tracking integrity and maintaining the liquidity of the ETF.
Note that, the dividends are reinvested immediately of open-ended ETF; however, the time can change accordingly to the index mutual fund. On the other hand, the dividends of unit investment trust ETFs are not again invested which creates then a dividend drag.
As you can see, ETF is an easy investment option which is convenience in every way. You can buy and sell funds at any time of the day so you can redeem your money at any time. That being said, ETF is indeed an excellent choice of investment.
