New Delhi: A listed index fund (ETFs) is generally a basket of securities that directly tracks an underlying index on stock exchanges. Investors can buy or sell units of this fund directly on the stock exchange. ETFs offer a low-cost investment solution to investors.

Since these funds hold hundreds of different securities, buying ETF shares can be a cheap and easy way to build a diversified investment portfolio.

Most ETFs aim to offer returns close to those of the overall market. These funds tend to have lower investment management fees than traditional mutual funds.

How do ETFs work?

exchange traded funds track the performance of a particular stock index or bond market. There are ETFs that track commodity prices by holding futures contracts or even physical commodities, for example gold ETFs. Investors can buy ETF shares through a brokerage or investment app the same way they buy stocks.

Types of ETFs

Equity ETFs

Stock ETFs are a very common and convenient way to buy a basket of stocks, without having to invest in hundreds of individual stocks. Some of the most popular stock ETFs are Nifty Bank, Nifty IT, Nifty 50, Nifty Infra, BSE Sensex, etc. While most stock ETFs are index funds, which simply aim to provide market returns, some funds are run by asset managers who attempt to pick winning stocks.

Bond ETFs

Bond ETFs own fixed income investments such as corporate bonds and government securities. Like equity ETFs, most bond ETFs track market benchmarks. Since bonds are considered less volatile than stocks, many investors are turning to their own bonds to make their portfolios less risky.

Sector ETFs

Sector ETFs seek to invest in the stocks of companies in specific industries such as infrastructure, consumer packaged goods, healthcare, energy and IT, among others. Also called sector ETFs, these funds benefit from the good performance of these industries, but can lag far behind their peers in the stock market when faced with headwinds.

Actively managed ETFs

While most exchange-traded funds aim to deliver returns that match those of some portion of the stock or bond markets, there are a growing number of funds that hire portfolio managers who pick winning stocks.

Commodity ETFs

Commodity ETFs, as their name suggests, track the prices of physical goods. In some cases, ETFs do not own these physical assets, but instead invest in futures contracts backed by these commodities. Because some futures contracts expire monthly, the returns of commodity futures ETFs do not necessarily match those of the commodity they target.

Currency ETFs

Currency ETFs track the price of one currency or a basket of various currencies. Also called forex ETFs, some currency ETFs are backed by bank deposits in foreign currencies.