Exchange Traded Funds (ETFs) are a mix of investments like stocks and bonds that track market indexes. Instead of picking one stock, ETFs let you invest in multiple assets at once. They trade on stock exchanges like shares, with prices driven by demand and supply.
ETFs offer low costs, flexibility to trade anytime, global market access, and diversification to spread risk. You can invest in NSE-listed ETFs through a CDS account or use apps for foreign ETFs.
One of the primary reasons ETFs are favored by many investors is their tax efficiency. Unlike mutual funds, ETFs are structured in a way that allows investors to minimize capital gains taxes.
When ETF shares are created or redeemed, the transactions are often conducted in a way that does not trigger capital gains taxes, unlike mutual funds, which may need to sell securities to meet redemptions.
Key Features of Exchanged Traded Funds.
Diversification:
ETFs often contain a diverse range of assets, which can help spread risk across multiple investments. For example, a stock ETF might track an index like the S&P 500, holding shares in all the companies listed on that index.
Liquidity:
Because ETFs are traded on major stock exchanges, they can be bought and sold throughout the trading day at market prices, providing high liquidity compared to mutual funds which can only be traded at the end of the trading day.
Transparency:
ETFs typically disclose their holdings on a daily basis, allowing investors to see exactly what assets are in the fund.
Lower Costs:
ETFs often have lower expense ratios than mutual funds due to their passive management structure. Most ETFs track an index rather than actively managing a portfolio, which reduces management fees.
Flexibility:
Investors can use ETFs to gain exposure to a wide range of asset classes, sectors, or geographic regions. They can also be used for various investment strategies, such as hedging, short selling, or margin trading.
Types of ETFs.
Stock ETFs:
These ETFs track a specific index or sector of stocks, such as the S&P 500 or technology companies.
Bond ETFs:
These funds invest in a portfolio of bonds, such as government, municipal, or corporate bonds, offering a way to gain exposure to the bond market without buying individual bonds.
Commodity ETFs:
These ETFs invest in physical commodities like gold, silver, or oil, or in commodity futures contracts.
Sector and Industry ETFs:
These focus on specific sectors or industries, such as healthcare, technology, or energy, providing targeted exposure.
International ETFs:
These ETFs invest in stocks or bonds outside the investor’s home country, offering global diversification.
Inverse and Leveraged ETFs:
Inverse ETFs aim to deliver the opposite return of a specific index, while leveraged ETFs aim to amplify the returns of an index, often by a factor of 2x or 3x. These are generally used for short-term trading rather than long-term investing.
What Do you Need to Know About ETFs in Kenya?
Understanding ETF Basics in Kenya.
ETFs in Kenya, like those in other markets, are investment funds that trade on stock exchanges, combining features of both mutual funds and individual stocks.
