ETF Meaning
ETF full form is Exchange Traded Funds, and Globally, they are one of the popular investment options for investors. In 2022, globally ETF’s AUM stood at USD 9.6 trillion. Even in India, the popularity of Exchange Traded Funds is going up. Indian fund houses have launched different types of ETFs to cater to the needs of investors in the last few months. As per AMFI data, fund houses have launched 35 ETFs in 2022.
In this blog, we will learn what is exchange-traded fund, how it works, and its advantages and disadvantages.
What is an ETF?
ETF is a type of mutual fund scheme that is listed and traded on the stock exchange and can be bought and sold through the exchange just like stocks. The majority of exchange-traded funds are passively managed while there are actively managed ETFs as well.
Types of Exchange-Traded Fund
ETFs are categorized based on where they invest. Let’s look at some of the popular ETFs types;
1. Equity or Market ETFs
These Exchange Traded Funds are designed to track a particular index like NIFTY 50 or SENSEX. For example, by investing in Nippon India Nifty 100 ETF, you get exposure to 100 companies comprising the Nifty 100 index through a single investment.
2. Thematic or Sector ETFs
These ETF investments are designed to provide exposure to a particular sector or theme, such as oil, pharmaceuticals, or technology. Rather than tracking the general market, a sector/thematic ETF tracks a basket of stocks that are related to a specific industry or sector, or theme. For example, investing in Axis Healthcare ETF will expose you to different companies in the healthcare sector.
3. Commodity ETFs
These ETF investments are meant to track the price of a commodity like gold, silver, oil, etc. For example, Nippon India GoldBeEs ETF gives you exposure to gold. They help you add commodity market exposure to your portfolio without directly owning the physical commodities.
4. International ETFs
International Exchange Traded Funds are designed to track international markets such as NASDAQ 100 Index or Hong Kong’s Hang Seng Index. Investing in an international ETF can give your portfolio international diversification, which is otherwise difficult. For example, Motilal Oswal NASDAQ 100 Index ETF exposes you to the internet and technology companies listed on the Nasdaq stock exchange.
5. Inverse ETFs
These exchange-traded funds are designed to deliver the opposite performance of the particular index. In this type of fund, you gain when there is a decline in the value of the index, and you lose when the value of the index increases. These are also known as Bear ETFs or Short ETFs.
6. Leveraged ETFs
These funds are similar to other ETFs; however, it uses debts and other derivative instruments such as Future, options, swaps, etc., to maximize the return of funds. It allows you to take a larger position with little capital.
7. Bond ETFs
Bond ETFs are also known as Debt ETFs. These are the types of funds that add a debt component to your portfolio. It provides exposure to fixed-income instruments and generates income from interest payments. These are passively managed investments that track particular indices and invest in securities in the same proportion as the underlying index.