Exchange-Traded Fund
A fund whose units trade on a stock exchange throughout the day at market-determined prices.
How it is identified
Test: units are listed and traded on an exchange, with creation and redemption in large blocks by authorised participants
Unit
qualitative
In depth
The difference between an ETF and an index fund is the trading mechanism, and it matters in three ways: an ETF trades intraday at a price that may differ from its underlying value, it requires a demat account and a broker, and it incurs brokerage and spread on every transaction. Its expense ratio is usually lower than an equivalent index fund's, but the total cost including spread can be higher for small or frequent purchases. An illiquid ETF can trade at a wide premium or discount to its indicative NAV, which is a risk index funds do not have. For a regular monthly investor, an index fund is generally simpler and often cheaper in total.
Worked example
An ETF with a 0.05% expense ratio but a 0.4% bid-ask spread costs 0.4% on entry alone. An index fund at 0.20% with no spread is cheaper for anyone holding under two years or buying monthly.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Exchange-Traded Fund” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.