What are Exchange-Traded Funds?

Exchange-Traded Funds

• An ETF is a pooled investment fund whose units are traded on stock exchanges like shares, providing exposure to an underlying portfolio or asset.

Key features of ETFs: 

• Exchange-traded: ETFs can be bought and sold during market hours at market-determined prices.
• Diversification: A single ETF can provide exposure to a basket of securities rather than one security. Broad-market ETFs reduce company-specific risk; however, market risk remains.
• Passive investment: Most ETFs seek to replicate the performance of an underlying index rather than actively select securities.
• Lower costs: ETFs generally have lower expense ratios than actively managed mutual funds.
• NAV vs market price: An ETF has a Net Asset Value (NAV) based on its underlying assets, while its exchange price may trade at a small premium or discount to NAV.
• Types: May track equity indices such as Nifty 50 or Sensex, bonds, gold, silver or specific sectors.
• India: ETFs are regulated by the Securities and Exchange Board of India (SEBI) and are listed and traded on stock exchanges.

Unlike a conventional mutual fund, an ETF is traded throughout the day on a stock exchange, allowing investors to buy or sell it at prevailing market prices.

UPSC PYQ 2024:

Q. Consider the following:

1. Exchange-Traded Funds (ETF)

2. Motor vehicles

3. Currency swap

Which of the above is/are considered financial instruments?

a) 1 only

b) 2 and 3 only

c) 1, 2 and 3

d) 1 and 3 only

Answer: (d) 

Practice MCQ:

Q. With reference to Exchange Traded Funds (ETFs), consider the following statements:

1. ETF is a pooled investment fund whose units are traded on stock exchanges like shares.
2. ETFs in India are largely unregulated financial instruments. 

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: (a)