The Sentinel

What Are ETFs And Its Advantages?

Mar 17, 2022
Unlike regular mutual funds, Exchange Traded Funds or ETFs usually trade like ordinary stocks on a stock exchange. ETF's units are bought and sold through a registered broker of a recognized stock exchange and it is listed on the stock exchange.
The units of ETF cannot be bought and sold like any ordinary open ended equity fund as the units are listed only on the stock exchange.
An investor can buy as many units as he wants and there is no restriction from the exchange.
The main difference between ETFs and other types of index funds is that ETFs do not try to outperform their similar index, but simply replicate its performance. They don't try to beat the market; they try to be the market.
ETFs generally have higher daily liquidity and lower fees than mutual funds, making them an attractive option for the individual investor.
The first successful ETF was launched in the US in 1993 to track the Standard & Poor's 500 Index (S&P 500) and is one of the most traded ETFs to date.
The first ETF was launched in 2001 to track the Nifty 50 index in India. ETFs are a cost-effective, passive alternative to mutual funds that empower an investor with exposure to the market and diversify their portfolio.
In short, ETFs are a safer option to track the performance of the market through an index and invest accordingly.
Since ETFs only track an index without exceeding it, the administrative cost to manage it is much lower than the expense incurred by mutual funds.
This is a significant difference from mutual funds, where the fund manager continuously trades securities in baskets to beat the market.