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The exchange-traded funds (ETFs) offer some distinct advantages over conventional mutual fund schemes. Let’s understand the basics of ETFs and see how you can make the most of this upcoming investing avenue.

Which were the three most actively traded securities on the major US stock exchanges last year? Are you thinking of some top-notch companies making their way on that list? Think again! They were exchange-traded funds (ETFs) based on the S&P 500, the Nasdaq 100 and the Russell 2000 indices. The popularity of ETFs in the US can be gauged by the fact that the number of ETFs listed there proliferated from 203 to 347 in the last year alone, with another 343 in the offing. The amount of funds, which all ETFs as a whole, manage is more than $410 billion in the US alone.

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o put it simply, an ETF is similar to an index fund. Just like an index fund replicates the investment pattern of a benchmark index, such as the Sensex or the Nifty, similarly, an ETF also tracks a stock market index, a market sector (such as technology, banking, etc.), or a commodity like gold. However, unlike normal index funds, ETFs, like stocks, are listed and traded on the stock exchanges on a real time basis. In short, ETFs are a combination of a stock and a mutual fund, since they represent a basket of stocks (like mutual funds) and at the same time, can be conveniently bought and sold on the exchanges (like shares) during trading hours.