What are ETFs?

An Exchange-Traded Fund (ETF) is a type of investment fund that is traded on stock exchanges, similar to
individual stocks. ETFs hold a diversified portfolio of assets, such as stocks, bonds, commodities, or a
combination of these, and are designed to track the performance of a specific index, sector, commodity, or asset class. This diversification helps spread risk, reducing the impact of any single asset’s poor performance on the overall investment.

ETFs are traded on major stock exchanges, allowing investors to buy and sell shares throughout the trading day at market prices, similar to individual stocks. ETFs generally have lower expense ratios compared to mutual funds because they are passively managed, aiming to replicate the performance of a specific index rather than outperform it. Some ETFs, however, are actively managed and may have higher fees, but they typically still offer cost advantages over mutual funds.

While ETFs offer diversification, they are still subject to market risk, meaning their value can fluctuate based on the performance of the underlying assets. Sector or commodity-specific ETFs may carry higher risk due to their focus on a particular area of the market. Additionally, leveraged and inverse ETFs are more complex and carry higher risks. ETFs offer an efficient and cost-effective way to gain exposure to a wide range of assets and markets. They provide the potential for capital appreciation, income through dividends, and the flexibility of trading like stocks.

The composition of each ETF depends upon its specific theme of investment. An ETF may have a dedicated focus on growth, value, fixed income, or a sector. Therefore, which ETF is suitable for you depends upon your financial and risk profile as we have discussed above. ETF’s have an advantage as compared to mutual funds in that they have lower expense and tax burden as compared to mutual funds.