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How Do Exchange Traded Funds Work?

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By Author: Swarali Chavan
Total Articles: 36
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What is ETF?

An ETF, or exchange traded funds is a marketable security which will track a stock index, commodities, bonds or a basket of assets. An exchange traded fund is different from mutual funds because share trades like common stock on an exchange. The price of an ETF will change throughout the day since they are bought and sold. The largest ETFs will have a higher average daily volume and a lower fee than mutual fund shares that makes them an alternative for individual investors. While a lot of ETFs track stock indexes, there are also ETFs which invest in commodity markets, currencies, bonds and other asset classes. If an investor wishes to get broad market exposure with low operating expenses, they can learn more about what is an index fund. A lot of ETFs have different options available for investors to use income, speculation or hedging strategies.

An exchange traded fund is a type of fund which owns assets such as bonds, oil, gold and stocks and it will divide ownership of the assets into shares. Generally, a lot of exchange traded funds are set up as an open-ended fund. They are just index funds which are listed and traded like stocks. Exchange traded funds help the investors to gain good exposure to the stock markets in different countries and selective sectors.

How do exchange traded funds work?

An exchange traded funds are a lot like a mutual fund wherein it’ s a combination of different stocks and different investment assets that are combined into a single investment product. Exchange traded funds are generally created by huge financial management institutions mostly because only large firms have the necessary assets to build an ETF together.

Firstly, a company will create a plan for the exchange traded funds where the assets that will be included are decided and other details like the fees and the number of shares are discussed. After they get the SEC approval, the participants can start the process of buying the shares of the ETF. The shares of exchange traded funds aren’t sold individually, they are sold in chunks of shares which are also known as creation units that may contain tens or thousands of shares.

These creation units are not purchased, rather they are traded for equivalent amounts of assets that the shares represent. These bought shares are placed with the custodial bank where a fund manager will oversee them and take a small percentage of the fund’s profits. The authorized participants who hold the shares of the ETF can trade those shares on the open stock market by selling them to individual investors. If they wish to cash out, they will have to buy up enough shares for making up their initial creation unit and simply trade the share back to ETF while receiving the equivalent assets in return.
Keywords: Exchange traded funds, What is ETF , what is an index fund

Author Bio:- Swarali Chavan is a finance professor who loves study about market investment instruments. She has written on Exchange traded funds. Through this article, she has provided detailed information on all you need to know about Exchange traded funds.

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