Question

Write an essay to a smart friend about Exchange Traded Funds. By this I mean write your essay to a person who is intelligent and can understand complex ideas but doesn’t know about ETFs. Explain to them the advantages and disadvantages of ETFs and why they might want to include them in an investment portfolio. z

Answer 1

Exchange Traded Funds are like mutual funds listed and traded on stock exchanges simillarly like shares, they are created by institutional investors swapping shares in an index basket, for units in the fund. They are like passive funds where the fund manager doesn’t select stocks on your behalf instead, it simply copies an index and attempt to accurately reflect its performance. They are a marketable security i.e, one can buy and sell units at prevailing market price on a real time basis during market hours.

Advantages

1. ETF allows risk management through variety investment.
2. ETF allows to trade various stocks within and outhside the country with minimum commission.
3. ETF are cost effective as they have low expenses since they track an index while investing.

Disadvantage

1. ETF add layer of complexity with the products as many a times investors do not understand the operational mechanics of operation of ETFs.
2. some times invester had to buy ahigh and sell at low.

One should invest in ETFs because they provide flexiblilty in the market as it can be brought or sold during market hours and they are transperant also. ETFs are traded virtually in any class, commodity, and currency in the world and it has tax benifits also.