An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks,commodities and bonds. Most ETFs track an index, such as the S&P 500 or NIFTY. They first came into existence in the USA in 1993. It took several years for them to attract public interest. Over the last few years more than $120 billion is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs.
The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. In India , Nifty Bees is the first index fund which tracks the S&P CNX Nifty.
Let us take a look at different types of ETFs.
Index ETFs : Most ETFs are index funds that hold securities and attempt to replicate the performance of a stock market index. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.
Commodity ETFs : Commodity ETFs invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries.
Bond ETFs : Exchange-traded funds that invest in bonds are known as bond ETFs.
Currency ETFs : These funds are total return products where the investor gets access to the FX spot change, local institutional interest rates and a collateral yield.
While similar to an index mutual fund, ETFs differ from mutual funds in significant ways, because of their low costs, tax efficiency, and stock-like features. To know more about ETFs, watch out for the Part 2, in which we discuss about advantages and disadvantages of investing in ETFs and details about various ETFs available in India…stay tuned !