An In-depth Look into the Beauty of Exchange Traded Funds(ETF)

You must have heard about Market indices(or Indexes as some may call it) which aims to track the performance of a group of stocks/instruments in a sector(e.g DowJones Index,S&P 500 Index, ). An Exchange Traded is much more. In the post I will explain why.
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A brief Synopsis.
Exchange Traded Funds also known as ETF is a unique financial instrument that tracks a particular index or indices of a particular sector. There are ETFs that track bonds, energy sector, retail sector, precious metals, manufacturing sector. In fact there are ETF for just about any unique combination you may think of and guess what? They are traded exactly like stocks. You can Daytrade, trade on margin, short sell, leverage etc.

So what is so special about it? 

As mentioned earlier, indices track a sector performance hence when a sector is doing well the index will rise and when the sector is doing badly the index will fall. Now because these indexes track an industry and not a company, they are less laborious to analyse than stocks but can still be traded exactly like stocks. This uniqueness of combining the features of a Mutual Fund, Stocks and Market indices just make it a MUST LEARN and MUST HAVE.

So is that all there is to the Hype?Nope.

Summarized below are the Advantages of ETFs

Low cost: ETFs trades are made at a significant lesser cost that buying and selling the underlying assets individually. This can be a huge advantage when you want to invest in a lot of securities(instruments/assets) but have low funds where margin requirements and repeated costs can seriously hamper your profit potential.

Returns: ETFs have been known to perform very well since they track the market itself. For a single ETF (though it depends on the economy and country) you can earn between 12%-30% per annum. This are attractive especially if you are used to savings accounts or fixed deposit of 3-9%.

Tax Benefits: Capital gain on stocks usually come at a price; you have to pay taxes. As you buy more stocks you have to pay more taxes. With ETFs, however you can own many stocks and pay less.

Diversification: Owning a single ETF investment automatically allows you to own all the underlying assests thus ETF's like Mutual Funds allow traders to diversify upon making a single purchase. 

Coverage: The myriad of choices ETFs presents gives you the flexibility over any market/sector or country. For instance, if you should choose to buy 4 ETFs of a country covering  different sectors you have quickly covered made significant investment in the country. Hence, should they be a well to do company you are going going to be seeing quick and rapid profits.

Dividends:  If you choose to hold ETFs whose underlying assets are stocks for a long period of time you will be entitled to the dividends of the underlying stocks.

It be well if the downsides of ETFs are not discussed.  ETFs tracking major indexes only allows you to track major companies. This may not be favourable if you are looking to trade more stocks than the underlying assets. ETFs are also known to expose you severely to an industry, should you choose to buy one in that sector. Finally a downside you may want to consider is their spread i.e the difference between the ask(buy) and (bid)sell price.

Other Notes: Some Traders do buy and sell the same securities by buying the ETF and selling the Stocks. By doing this they benefit from the differential in price which occured because of the different market and way they are traded. This kind of trading is called Arbitrage it is normally frowned upon by some but is quite profitable if you are able to pull it off.