What are ETFs?

ETFs, which stand for Exchange Traded Funds, are a type of financial products. Exchange Traded Funds are open ended investment funds. They are listed and trade on a stock exchange, much like stocks. They are passively managed by ETF managers. They aim to produce a return similar to an index. There are cash based exchange traded funds or synthetic exchange traded funds.

The exchange traded funds have some good advantages. They offer the benefits of diversification, liquidity, transparency and flexibility. Also, you can gain exposure to the performance of the index. They offer lower operating and transaction costs than actively managed funds. There are some risks as well, associated with the exchange traded funds, like they are not principle guaranteed. Also, the manager may not  be able to adjust the underlying component stocks. It is believed in general, that the exchange traded funds are a complex product.

What should be your considerations when selecting the Exchange traded funds or ETFs? You should ask about the transaction charges and hence have a clear idea about the same. A very important consideration to be made is to check the strategies of the exchange traded funds and ensure that they are in line with yours.

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