What Are The Different Types Of ETFs, And How Do They Work?

Do you want to stay away from active trading risks but earn high returns? Then, Exchange-Traded Funds (ETF) can be a suitable alternative for you.

ETFs are similar to index funds, where you invest your money in a company trading in a basket of securities belonging to a particular category. They allow you to spread your equity investments across various companies, diluting the risk involved in individual stock trading. But unlike index funds, ETFs are traded on the Stock Exchange Board of India (SEBI), where you can sell or buy them anytime during a trading period.

What are the types of ETFs?

ETFs are categorised according to the pool of assets present under them. So, while most ETFs are Sensex or Nifty based, there are other types as well. Let’s take a look at some of them.

1. Equity ETFs

Equity or stock ETFs contain shares of companies from a specific industry or sector. They are a compilation of best-performing or high-potential stocks in an industry. If you think the industry has growth potential but are unsure about the companies that can give you the best returns, invest in an ETF of that industry. The yields will be proportional to the growth of each component in the ETF. So, even if some stocks do not perform as expected, your profit is not affected significantly.

2. Bond ETFs

Bond ETFs exclusively trade in fixed-income assets like debentures and government bonds. They are a collection of investments with different prices and maturity dates. The interest income from these bonds is paid to you as monthly dividends, while capital gains are credited as annual dividends. Since there are many bonds in an ETF, some will be due for a coupon payment at any given time. This guarantees you a regular income from the investment.

3. Commodity ETFs

Currently, only two types of commodities are available for ETF trading in India gold and silver. They allow you to invest in these commodities digitally without the risk of physically owning these assets. In addition, the values of commodity ETFs replicate their bullion markets. So, you can invest in ETFs instead of buying gold or silver from a shop, which is time-taking and harder to sell during an emergency.

4. International ETFs

These ETFs allow you to invest in foreign securities. Through this, you can invest in a group of foreign listed companies without contacting a broker with an international tie-up. The transactions are conducted in INR, allowing you to invest small amounts in these indexes. Some popular ETFs in India are MOSL NASDAQ 100, Mirae Asset NYSE FANG+ETF, and HDFC World Index Fund.

5. Currency ETFs

Currency ETFs provide exposure to investors in the foreign exchange market. Currencies of different countries are pooled together in an EFT, and their growth is monitored to gain profits. You can invest in one or more currency pairs to take advantage of the fluctuation in their exchange rates.

How to invest in an ETF?

ETF buying and selling are similar to equity trading on the stock market. First, you place an order for the number of units of an ETF with the amount, directly on the stock market or through an AMC terminal. The units get credited to your Demat account on the clearing day. Then, you can monitor the price fluctuations of the ETF. Similarly, to sell these units, you have to place a sell order on your trading platform.

In conclusion

ETFs have the stability of a mutual fund and the returns of equity shares. They do not limit your returns to the performance of a single company or asset. Also, they allow you the flexibility of changing your investments swiftly if a particular asset is not performing well. All these benefits make ETFs an attractive investment option for you. So, get started on your ETF research and choose the one that suits your financial plans the most.

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