What are exchange-traded funds (ETFs)?

Oct 13
Exchange-traded funds (ETFs) are index funds that follow the structure of the underlying index, asset, or collection of assets, and exchange rate and whose shares are traded on an exchange.

Similar to stocks, the price of ETF shares fluctuates during the trading day in step with the underlying asset.
The responsibility of the fund manager is to make the right investments and keep accurate records to match the performance of the underlying assets.
Exchange-traded funds give traders and investors the chance to invest in markets that would otherwise be prohibitively expensive or difficult for them. An S&P 500 ETF, for instance, is simpler to purchase than all S&P 500 businesses, whose shares must be properly accounted for and must be sold in the same manner when the position is liquidated.

ETFs also give investors control over entry and exit strategies that are not feasible with individual stocks or other securities, such as mutual funds, whose prices change throughout the trading day.

As the underlying assets gain in popularity, so does the array of possible ETFs. ETFs lower investment risk while enabling investors to invest in novel sectors and markets, like cryptocurrency. ETFs open up the market for currencies and commodities to a broader group of investors who might not have previously done so.

Another technique that enables playing against the market is inverse ETFs. In other words, shares of inverse ETFs increase as the value of the underlying asset decreases, providing bears with a rare chance to profit from a declining market.

Exchange-traded fund shares are regarded as passive investments because fund managers do nothing more than monitor the underlying asset's performance. Therefore, purchasing an ETF is an investment in the assets of the fund rather than the manager's (or management team's) capacity to select profitable investment opportunities.

Investors may prefer the effectiveness of ETFs since they save time and money by not having to search for new investments, modify their existing holdings, or rebalance their portfolios. Additionally, because the ETF's assets do not change as frequently as they would in an actively managed fund, the effect of capital gains taxes is reduced.

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