Definition: What is an Exchange Traded Fund (ETF)?
An Exchange traded fund is defined as a type of investment fund that pools together capital from a wide range of investors.
The accumulated capital is then invested on various types of securities that might include stocks, bonds, and derivatives.
Exchange traded funds are different from mutual funds as they are traded on stock exchanges. As an investor, you can buy, sell or trade ETFs just like trading or investing stocks.
Another difference is that ETFs do not have net asset values like mutual funds.
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Advantages of Exchange Traded Funds
One key advantage of exchange-traded funds is that they provide extensive flexibility and liquidity for investors, as they can be easily traded.
ETFs can be sold short, purchased on margin, or retained for an extensive period of time like stocks.
In addition, the managerial fees charged by the fund managers are much less than that charged by mutual fund managers. This is because ETFs do not require much oversight from the fund manager. This leads to lower administrative and managerial costs than traditional mutual funds.
Like any stock that is traded publicly, ETFs are susceptible to market volatility and their value can fluctuate.
Furthermore, unlike most mutual funds, ETFs are not required to limit investments in one industry or company.
So, if an ETF is invested heavily in a failing sector or firm, its price could drop dramatically.
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