Exchange-traded funds or etfs are investment funds that trade onvarious stock exchanges. etfs trade over a session (the course of one day of trading) and trading closes at its net asset value. the investment funds can comprise of various assets such as commodities, [bonds], or stocks and can only be bought or sold from authorised participants and then only in specified blocks of shares in the etf.
Etfs tend to track [stock indices] but may also consist of shares in various companies all of which may operate in the same industry sector such as a gold miners etf.
Traders need to take into consideration that there are numerous costs associated with this investment fund. two of these costs are:
- commissions payable - the more one trades, the higher the commission to be paid from your investments. however, some platforms offer commission-free options.
- spreading impact –meaning in most cases a loss is suffered as one would purchase at a certain price but the impact of [spreading] dictates that these shares have to be sold at a lesser price than what it was bought for, therefore it's advisable to go for a smaller spread.[limit orders] can be used to mitigate this factor.
Some of the key advantages of etfs include the fact that they are completely transparent, offer great diversification, they offer a reduced tax liability in most countries and lastly, a liquid market enables etfs to be bought and sold easily.
There are also several challenges associated with etfs that traders need to take note of. when derivatives are used with etfs, one party might not make good on the agreement between them and there is also the risk of tracking errors involved as etfs don’t always track their indices accurately.
key takeaways:
- Etfs are investment funds that trade on stock exchanges.
- Traders need to take into consideration the various costs associated with trading etfs such as the impact of spreading and commissions payable.
- There are several advantages and disadvantages associated with etfs that traders need to be knowledgeable about.