Introduction to Exchange Traded Funds (ETF)
ETF is a new investment product that lists the index fund’s shares on the stock exchange, so that it can be traded like stocks, and thus provides advantages of both, index funds and stocks.
ETF is an index fund traded like stocks
Although ETF is an index fund, unlike typical index funds, it is listed on the stock exchange and traded like stocks. ETF can be traded freely during the trading hours of the exchange on a real-time basis, by placing orders with a securities company, through the HTS or over the phone, just like stocks.
ETF is an index fund
Although ETF is traded like stocks, it is an index fund tracking a particular index to realize a rate of return tied to that of the benchmark index.
ETF has the advantages of both, stocks and index fund
Traded like stocks on the the downside of an index
exchange, ETF, though it is an index fund, does not have
gap between the investment decision making and actual investment. For example, if an investor requests creation of an index fund, it would be created in the morning of
same happens with redemption. redemption price is decided at the
If an investor requests redemption, since price of the following day, the investor could
redeem exactly at the desired price.
However, in the case of ETFs, there is no time
gap because ETFs are traded time that the investor desires.
Difference between ETFs and traditional mutual funds (“MF”)
¾ Investment Procedure for MFs The investor who wishes to create a fund makes a creation request and delivers cash to the distributor (e.g., securities company or bank), the distributor pays the money into the fund, receives share certificates or shares for the amount paid in and delivers them to the investor.