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What Are Exchange Traded Funds?
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Exchange traded funds or ETF is a type of investment option which is classified as a marketable security that will track bonds, a commodity, an index or a bouquet of equity assets such as index funds. The ETF is traded on stock exchanges which are similar to equity stock of companies, which differentiates it from the way mutual funds are traded. Since they are traded in a similar manner to equity stocks, the exchange traded funds are prone to price changes throughout the day whenever they are bought or sold. Exchange traded funds offer a high degree of liquidity when compared to mutual funds. The exchange traded funds do not have a net asset value, which are unique to mutual funds.
Working of exchange traded funds:
An exchange traded fund will usually represent a basket of products/assets, this type of investment is inclined to own the assets underlying the fund. Such assets include but are not limited to company stocks, oil futures, gold, foreign currency and bonds. Exchange traded funds divides the total assets it owns into smaller units which are termed as shares, which can be traded on the exchange. The trading value of an exchange traded fund will be based on the applicable value of the net assets that the exchange traded fund is comprised of at a specific point in time. Exchange traded funds are bought and sold on stock markets like company shares, hence exchange traded funds may also be considered similar to a mutual fund which can be bought and sold on the stock exchange and the trading value can change in real time.
Benefits of exchange traded funds:
1. Exchange traded funds provide an intra-day trading opportunity which these funds provide. As a result, the short-term speculative investments are easily carried out. When done correctly it can be as lucrative as stock trades through a profit booking mechanism which is similar to equities.
2. The market trading benefit of exchange traded funds extends well beyond the trade. Some of the advanced trading techniques which are supported by an exchange traded fund includes trading on margin, short selling and different speculative strategies. Since these are not easy to perform successfully, they will provide the traders with the opportunity of earning huge profits in a short time.
3. Exchange traded funds are generally considered unique since they have a low expense ratio, which generating savings and can increase the payouts in the long term. The expense ratio savings can be invested back into the investor’s portfolio which will allows the investors to earn even more in the long term.
4. Diversification is also considered a key benefit which an investor derives from exchange traded fund investments. An investor can potentially choose from a range of exchange traded funds which will differ on the basis of the underlying asset.
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