Exchange Traded Funds

An exchange traded fund looks like a mutual fund that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. The shareholders do not directly own or have any direct claim to the underlying investments in the fund; rather they indirectly own these assets.

ETF shareholders are entitled to a proportion of the profits, such as earned interest or dividends paid, and they may get a residual value in case the fund is liquidated. The ownership of the fund can easily be bought, sold or transferred in much the same was as shares of stock, since ETF shares are traded on public stock exchanges.
A trader benefits from ETF via the way of arbitrage. Since both the ETF and the basket of underlying assets are trade able throughout the day, traders take advantage of momentary arbitrage opportunities, which keeps the ETF price close it its fair value. Unlike Mutual funds, ETF have a CMP and don’t have NAV which is calculated at the closing of the day

Meanwhile an investor can create value via the means of normal ETFs and leveraged ETFs which uses of derivative products to create inverse or leveraged ETFs. Inverse ETFs track the opposite return of that of the underlying assets — for example the inverse gold ETF would gain 1% for every 1% drop in the price of the metal. A 2x gold ETF would gain 2% for every 1% gain in the price of the metal. There can also be leveraged inverse ETFs such as negative 2x or 3x return profiles.

By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for ETFs are less than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any regular order. Since ETF are stored electronically, the risk of physical loss is also averted.

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