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An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks.

[1] An ETF holds assets such as stocks, commodities, or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.[2][3] ETFs are the most popular type of exchange-traded product. Only so-called authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly from or to the fund manager, and then only in creation units, large blocks of tens of thousands of ETF shares, which are usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares for the long-term, but usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates to the net asset value of the underlying assets.[4] Other investors, such as individuals using a retail broker, trade ETF shares on this secondary market. An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value.
Types of ETFs

Index ETFs
Most ETFs are index funds that hold securities and attempt to replicate the performance of a stock market index. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.

Commodity ETFs or ETCs
Commodity ETFs invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries.

Bond ETFs
Exchange-traded funds that invest in bonds are known as bond ETFs.

Currency ETFs or ETCs
In 2005, Rydex Investments launched the first ever currency ETF called the Euro Currency Trust (NYSE: FXE) in New York. Since then Rydex has launched a series of funds tracking all major currencies under their brand CurrencyShares.

and can be bought/sold on a real time basis. this could be a bit of a deterrent. while the expense ratio of a passively managed ETF (tracking a benchmark index) would normally be in the range of 0. for an index fund.[4] Leveraged ETFs Leveraged exchange-traded funds (LETFs). Given ETFs are traded on the stock exchange. 2. registrar costs and opportunity loss.50%-1. if the fund manager is forced to sell his best stocks) associated with this quick inflow/outflow. publishing their current securities portfolios on their web sites daily. ETFs tend to be more cost-effective vis-a-vis comparable mutual funds. Since ETFs witness most of the buying/selling on the exchange. are a special type of ETF that attempt to achieve returns that are more sensitive to market movements than non-leveraged ETFs Advantages of ETFs 1. with a SEBI registered stockbroker. Take a regular equity fund where units are bought and sold at the AMC¶s end ± when a significant amount of money enters and exits the fund rather quickly. or simply leveraged ETFs. the long-term investor could suffer as a result of the costs (trading costs.00%. However. they are available to investors any time during the trading hours. which can be transacted only at end-of-day NAV. Another important advantage with ETFs is that they provide more flexibility to investors than regular mutual funds. For instance. For investors. the SEC has indicated that it is willing to consider allowing actively managed ETFs that are not fully transparent in the future. his quick entry/exit does not compromise the interests of the long-term investor. maintaining a demat account entails paying annual fees (approximately Rs 500). since the trading investor does not approach the AMC at all and only interacts with other investors over the exchange. they tend to have low tracking error (deviation of ETF¶s performance from that of the underlying index) as compared to index funds. With an ETF. Disadvantages of ETF 1. So investors can buy and sell units of an ETF on a real time basis. the interests of the longterm investor are not compromised. The actively managed ETFs approved to date are fully transparent. 4.Actively managed ETFs Actively managed ETFs are quite recent in the United States.50%. it can be as high as 1. unlike regular mutual funds. Since they are traded on the stock exchange. The first one was offered in March 2008 but was liquidated in October 2008. Investors need to have a demat and a trading account. who do not trade in stocks. Also. 3. for investing in ETFs. however .

Disadvantage: Taxes ETFs are known for their tax advantages. who invest in stocks.the same varies across stockbrokers. 3. But for long-term investors. For investors. While foreign ETFs can help minimize risk. Disadvantage: Currency Rates While adding a foreign ETF may be a boon to your portfolio. Trading activity for foreign ETFs can be limited and in turn limit your investment strategy. 6. and diversify your portfolio. the consultant. according to Hennessee Group. a country ETF may not be the best match for your portfolio. the selection may be sparse for other countries. every time ETF units are bought or sold. However. a country ETF may be the perfect asset to increase your international exposure. Roles Growing use of exchange traded funds has contributed to an increase in correlations between individual equities. so there may be particular foreign ETFs that are not a good fit for your etf trading strategy if they have a negative effect on your tax return. Make sure you research all tax laws of the region for your ETF before you make the investment. Disadvantage: Flexibility While the US has a lot of different ETF products to add to your portfolio. 5. 2. 2. Many regions don¶t have a lot of ETFs. every country has different tax laws. growing popularity of ETFs and their rising share of overall trading volumes was contributing to the stock market being driven more by sentiment about broad economic issues rather than company fundamentals imp . Advantage: Diversification If your portfolio is heavy on domestic investments. and they aren¶t always to most liquid investments. posing particular problems for long-short equity hedge funds. Adding a country or region ETF to your portfolio can expand your investment horizon. Advantage: Foreign Exposure If you feel there are some foreign regions that are potential growth areas or emerging markets. 1. these expenses hold little relevance. investing in a foreign ETF may be a good way to reduce that risk and protect yourself against negative developments in certain countries. 4. you have to factor in the currency rates of your ETF region. you have to weigh the disadvantages of region ETFs before you get started and make your final decision to include them in your portfolio. Advantage: Risk Management If your portfolio or business has exposure to a certain region. For a trader who frequently trades. this can have a significant impact on the net returns. If currency rates are skewed. gain international exposure.50%) to the stockbroker. along with other applicable charges (STT for instance). some foreign exposure may help balance your overall stratagem. for ETFs they have to pay a brokerage (usually around 0. this will not pinch as the maintenance charge of the demat account will be spread across the stock and ETF investments. While investors have to incur entry/exit loads at the time of making/redeeming investments in mutual funds.

both Institutional and Individual. risk tolerance. thus avoiding potential opportunity costs. from using them to gain market exposure. The large denomination of most derivative contracts can preclude investors. ETFs provide a "Parking Place" for cash that is designated for equity investment. They cover a range of style and size spectrums. ETFs can also be used for cover Option strategies on the Index. ETFs are a practical alternative. However.Asset Allocation : Asset allocation managing could be difficult for individual investors given the costs and assets required to achieve proper levels of diversification. Cash Equitisation : Investors typically seek exposure to equity markets. enabling investors to build customized investment portfolios consistent with their financial needs. but often need time to make investment decisions. Arbitrage (Cash Vs Futures) and Covered Option Strategies: ETFs can be used to arbitrage between Cash and Futures Market. Historically. as it is very easy to trade. particularly for small investment portfolios. In this case and in those where derivative use may be restricted. efficiently. Both institutional and individual investors use ETFs to conveniently. . ETFs provide investors with exposure to broad segments of the equity markets. investors can participate in the market while deciding where to invest the funds for the longer-term. The smaller denominations in which ETFs trade relative to most derivative contracts provides a more accurate risk exposure match. Because ETFs are liquid. and investment horizon. and cost effectively allocate their assets. investors have relied heavily on derivatives to achieve temporary exposure. derivatives are not always a practical solution. Hedging Risks : ETFs are an excellent hedging vehicle because they can be borrowed and sold short.