ETF

ETF stands for Exchange Traded Fund. Like an index fund, it tracks an index at low cost, but you buy and sell it on the stock exchange during market hours, at a live price, through a demat account.

How it works

An ETF holds the same basket as the index it follows, but its units trade on the exchange just like a share. That means its price moves through the day with the market, and you buy or sell at that live price rather than at a once-a-day NAV. Because it is passive, with no manager picking stocks, its expense ratio is very low, usually among the cheapest ways to own a slice of the whole market.

ETF versus index fund

Both track an index cheaply, and the difference is how you buy them. An ETF needs a demat account and trades on the exchange at a live price, which suits someone who already deals in shares. A regular index fund needs no demat account, is bought straight from the fund house at the day’s NAV, and accepts an automatic monthly SIP easily, which suits a hands-off investor. For most beginners doing a monthly SIP, an index fund is simpler; an ETF appeals if you want exchange trading.

What to watch

Because an ETF trades live, its market price can drift slightly from the value of its underlying holdings, and you pay the usual brokerage and charges on each trade. Gold and other assets also come in ETF form. See index funds for where they fit.