Exchange Traded Fund is one special type of open-end fund, which is one of the flukiest financial innovation. ETFs were introduced in the 1990s, and demand of this fund has increased obviously in the both of institutional and retail investors. Besides, a significant growth of the total net assets of ETFs happened in the past 10 years, from 151 million USD at 2003 to 1.8 trillion USD at 2014. ETFs is traded in the securities exchange, IOPV (Indicative Optimized Portfolio Value) is showed every 15 seconds, which indicate the relationship between the change of index and the change of net value of fund8

 

One of the best methods to tell the advantages of the ETF trading as stock is to examine it to the buying and selling of a mutual fund. Mutual funds are priced once according to day, in contrast to ETFs which may be traded intraday, imparting the traders a possibility to guess the course of shorter-time period marketplace actions via the trading of a single security.9 Unlike mutual funds, ETFs can also be used for brief promoting and buying and selling on margin which might be known as the speculative margin techniques. ETFs are available in close at hand whilst buyers need to create a diversified portfolio. The ETF’s are more diversified due to the fact they generally searching for publicity to vast indices. Masses of ETFs available, that cover each primary index (S, Dow, Nasdaq), quarter of the equities market (big caps, small caps, boom, fee). Unlike constant-earnings ETFs, a few equity ETFs additionally pay dividends and those dividends are deposited right into a brokerage account or reinvested. Some research display that the number one component responsible for funding returns is asset allocation, and ETFs are one of the convenient methods for investors to build a portfolio that meets the allocation desires of a selected asset. As an instance, an investor in search of an allocation of 60% stocks and 10% bonds can without difficulty create that portfolio with ETFs.10 The investor can diversify via dividing the stock component into huge-cap increase and small-cap fee shares, and the bond portion into mid-term and short-time period bonds. ETF’s are handled as tax green and less expensive and that’s why they are a favourite among tax-conscious buyers and the low turnover price will commonly bring about fewer taxable distributions to traders and the portfolios that ETFs represent are even extra tax green than index budget. ETFs normally best promote portfolio securities while the underlying indices rebalance. The motive behind the low price ratio is that ETFs aren’t actively controlled and they are shielded from the costs which are associated with buying and selling of stocks to deal with shareholder purchases and redemptions. The capital gains may be minimised through replacing those stock which are being bought out of the index price range for the ones funds which can be being introduced to the index. shopping for and promoting of a fund is not a taxable occasion but its performed inside the like type exchanges. every other big gain of ETF’s is the very low value of operation, it is nearly half the annual fee of an index fund due to no overhead costs associated with having a portfolio supervisor. for example, the yearly rate ratio for a foreign equity fund averages 2.92%. An index mutual fund will common 2.06%. However an ETF fund will range from 0.75% to 1.30%.11

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In contrast to its advantages, the disadvantages of Exchange Traded Funds might appear to the surface, especially for the bank industry which provides ETF investment. One of the main disadvantages is their immature existence in the investment sector. ETF industry itself exists since late 1980s, it is categorically as a new sector compared to other investment tools. Moreover, most of the ETFs, which are currently available in the market, are feasible just in the past few years. Therefore, it will be tougher for the investors to track the trend of the ETFs they want to invest in. The other problem arises as Morningstar and Lipper, as two of the most leading fund researchers, do not even rate ETFs, which only exist under three years old. It is believed that most of the ETFs which available in the market are not rated with the professional rating companies. Hence, all the ratings and valuation are left to the investors themselves. After examining the trend of ETF for several years, the investors can finally have a realistic sense on how the ETF industry runs and acknowledge the difference between theoretical behind ETF and actual investment results12.

The other disadvantages are related to the market risk as ETF can wane because of the vital economics influences happen or the changes of policy in which affecting the index behind the particular ETFs13 and in terms of the international investments for ETFs, their values can also drop due to the fluctuations of currency exchange rates, the principles of accounting differences or instability in political or economics in other countries14.

The points why ETFs are so popular are simple to realize. The related costs are low and the flexibility is high, which can let investors invest easier. Yet, the investors who prefer passive management as well as who want to make small investments on more regular basis are suggested to buy the conventional index mutual fund because brokerage commissions may too high for them in the accumulation phase (in investment

process).