What is Exchange Traded Fund (ETF)?
Let's find out Exchange Traded Fund (ETF) meaning, definition in crypto, what is Exchange Traded Fund (ETF), and all other detailed facts.
Exchange-traded fund (ETF) refers to a basket of securities that can be traded as a single stock on a traditional or crypto exchange platform. The assets contained in the basket can be cryptocurrencies, bonds, commodities, and stocks, to name a few.
ETFs are similar to mutual funds since they allow investors to diversify their returns and include several asset classes combined. However, unlike ETFs, mutual funds can only be traded once a day, during the closing hours of the market.
The prices of ETFs tend to fluctuate throughout the day with each sale. Investors trade ETFs as means to diversify their portfolios, since the assets in the basket may be invested in several different sectors. However, in some cases, an ETF may be invested in only one sector.
ETFs are used to track the performance of single market indexes like S&P 500 or FTSE 100. SPDR S&P 500 ETF Trust (SPY) is used to track the S&P 500 index, while the iShares Russell 2000 (IWM) tracks the small-cap index of Russell 2000.
The costs of exchange-traded funds are considered to be low, particularly with regards to passively managed ETFs that track the performance of an index. Some ETFs may be managed actively. In this case, portfolio managers take the role of ETF management and make investment decisions that may not be based on the performance of the underlying index.
There are two key tax advantages of opting for an exchange-traded fund instead of mutual funds. For starters, the capital gains tax only applies when the ETF is sold. Unlike with ETFs, the capital gains tax of mutual funds changes throughout the entire period while the investor holds the portfolio, known as the investment horizon.
ETF investors are also able to take part in short selling. During this trading process, they can sell stocks that they do not own and buy them back later, when the price of the security is lower.