Exchange traded fund (ETF)

Exchange-traded fund (ETF) as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reproduce an index such as the Nifty.

An ETF, however, is not a mutual fund; it trades just like any other scrip on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an ETF's NAV changes throughout the day, fluctuating with supply and demand. It is important to bear in mind that while ETFs try to imitate the return on indexes, there is no assurance that they will do so accurately.

By owning an ETF, you get the diversification of an index fund plus the suppleness of a stock. Because, ETFs trade like stocks, you can take various positions on it like buy/short sell with the available margin. An additional advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When trading ETFs, same commission is paid to broker similar to other listed securities.