Exchange-traded funds, commonly known as ETF funds have been around since the year 1993. These funds first came into being as less known and obscure financial securities. On the present day, ETF funds are a necessary tool for retail and professional investors alike. The best ETF funds are driving huge changes and developments in the sphere of investment management.

What is an exchange-traded fund?

At their very basic core, exchange-traded funds are funds, which are usually made of bonds, commodities, stocks, or certain other assets. These assets are developed in a manner so that they can track a certain index.

The popularity of exchange-traded funds or ETFs is rising constantly. Internationally, ETF funds have been seeing assets under management or AUMs rise from around two hundred billion dollars in the year 2003 to higher than four trillion dollars in the year 2017.

How does an exchange-traded fund work?

ETF funds are developed by the huge money managers, such as the Vanguard Group. These groups bundle the fund’s underlying instruments together. There are a lot of regulatory steps that are taken. After these steps, ETF funds are generally offered to the public for sale.

Different types of ETF funds

There are a lot of high dividend ETF funds available. The wide range of some of the best ETF funds is suited to most tastes, styles, industries, or asset classes. Many of these funds can track indexes, such as Standard and Poor’s 500 index. In case the value of Standard and Poor’s 500 rises, the value of the exchange-traded fund rises as well.

Certain ETF funds can track indexes which follow certain currencies, commodities, and bonds. Other ETF funds do their investments in certain precious metals, such as gold. Certain more esoteric exchange-traded funds may even be designed in order to reflect the fluctuations in something as intangible as the volatility in the market.

Leveraged ETF funds are also prevalent in the market. These funds are designed in a way that they can multiply the everyday returns of a certain asset class or index. Needless to say, this aspect comes along with a much higher risk. Leveraged exchange-traded funds are known to deliver very high returns. But these ETF funds can be extremely volatile. One can, in fact, lose a lot of their money quickly. There are certain signs that you should be looking for in a leveraged ETF fun, such as, words like ‘3X’, ‘2X’, ‘Enhanced’, and ‘Ultra’. The returns are higher, or even significantly worse than those in the market in general.

How is ETF similar to mutual funds?

ETF funds and mutual funds are quite similar in many important ways. Similar to mutual funds, the exchange-traded funds enable their investors to quickly spread the risk over a great arena of investments. Sometimes these investments are even 100s at a given time. This manner of investment is done as opposed to buying a bond here, a stock there, so on and so forth.

Both mutual funds and ETF funds provide the investors an easy method for becoming very well diversified. The investors need not spend transaction costs and time to create a diverse portfolio. Diversification is extremely important in investment portfolios, particularly so for the retail investors. Diversification enables these investors to participate in the upside of a market with reduced risk and volatility than that of a 3 or 5 stock portfolio.

Advantages of exchange-traded funds over mutual funds

If you study the differences between mutual funds and exchange-traded funds, you are likely to form an opinion in favor of exchange-traded funds. Most of the mutual funds in the market today do not offer the liquidity which ETF funds do. Only the closed-end mutual funds carry on trade all day. Even these funds are leveraged and manage with debt. The traditional open-ended mutual funds get priced at the day’s end. The shares have to be sold when the money starts flowing out.

The ETF funds are much more liquid. These funds are more practical and definitely much easier to trade and invest in and out of. An important advantage of ETFs is that these funds typically charge lower fees for maintenance. These funds are, therefore, a wise choice if you want to invest a significant amount of money.