What are Exchange Traded Funds? ETF: A Guide for beginners

Exchange Traded Funds

The Exchange Traded Funds are the marketable securities that track down the stock indices, commodities, bonds or assets. Exchange Traded Funds are an offering of low-cost access to every corner of the market virtually. It allows potential investors whether big or small to build an institutional portfolio with accurate transparency. Exchange traded funds have all the aspects of mutual funds except one which is it can be exchanged and traded. Exchange traded fund’s price fluctuates all throughout the day it operates like a common stock exchange platform which is bought and sold with the difference in prices.

Exchange Trade Fund is one of the kinds that own underlying assets which are the shares of stock, gold bullion, foreign currency, bonds etc and bifurcates its ownership into shares. Some set of Exchange Traded Funds are distinguished and established as Unit Investment Trust (UIT)  which on mandatory notes has the date set in the future when it will be nixed. As UIT is an extended version of ETF the UIT can grand the perpetual succession of date. It acts parallel to the standard open-ended funds.

 

What do Exchange Traded Funds holders get?

Exchange Traded Funds holders also called ETF shareholders are entitled to some proportion of the profits which includes the dividend paid, earned interest or a residual value if the fund by any chance is liquidated. An Exchange Traded Fund is considered to have more tax efficiency than Mutual fund as most of the exchange and trade of funds is done through a proper exchange and it does not create the necessity for the sponsor to redeem shares every time an investor wishes to sell or buy the new share. In mutual Funds every time an investor trades on shares ( buy or sell) it is mandatory for them to sell the share back to the fund which generates the tax liability and which is supposed to be paid by the shareholders of the funds and increases the cost of investment. On contrary, this is not the feature in Exchange Trade funds. This is the reason it has a lower cost than that of mutual funds.

 

How is an Exchange Trade Fund created?

Exchange Trade funds can be bought or sold directly from any brokerage account. As simply the way you buy the shares traditionally in stock, you just have to do the entry of buy order in the fidelity account and buy any Exchange Traded Funds of your choice.

As Exchange Traded Funds are the lower cost marketable securities and are much more preferred by the investors due to its relatively less tax liability. Exchange Traded Funds have a strong resemblance to the index funds which on parallel notes can be traded too. Exchange Traded funds to not sell shares directly to the investors instead of the sponsors issue the large blocks sometimes more than 50000 shares which are called creation units. These creation units are brought by an authorized participant. An authorized participant after obtaining the share splits these creation units into the Exchange Traded Funds shares which associate the legal fraction to it and then sells them into the secondary market. In order to liquidate the holdings, most of the holders sell their Exchange Traded Funds shares in the open market.

Exchange Traded Funds is the tool which provides the accessibility to different corners of the market. The trade of Exchange Traded Funds has multiplied over the recent years and the amount of offerings has escalated too. Exchange Traded Funds do not have any front or back end loads. As ETFs are not actively managed due to the recent invention most of the ETFs have minimal expense ratios which makes it much more affordable than multiple investment alternatives. And there are no minimum requirements of the buying of shares it can be bought as low as one share too. Exchange Traded Funds can be bought and sold (traded) all day long whereas mutual funds can just be traded at the end of the day. The payment of Exchange trade Funds is done in stocks. The biggest edge over the investment Exchange trade funds has that the investor does not have to sell shares to assimilate cash in order to return investors.

 

The risk associated with Exchange Traded Funds

Even though Exchange Traded Funds are more tax efficient, cheaper than mutual funds in the market and also they carry a good amount of transparency and liquidity It still has dozens of risks associated with it. Exchange Traded Funds have one of the biggest market risk as the market is very dynamic and the ETF price can be bullish or bearer at any point of the day, So the predictability of market is very uncertain.  And also selecting an ETF share in accordance to the past analytics is difficult too due to the dynamism in the rate structure. Even though the tax structure is simple for Exchange Traded Funds but this exotic tax structure has the risk associated too. The dichotomy of the Exchange trade funds is complex and difficult to understand but once you get a hand on it. It is one of the most dynamic and exciting investment.

Leave a Comment

sing in to post your comment or sign-up if you dont have any account.