An exchange-traded fund (ETF) is an investment fund traded on stock exchanges on real-time basis, in a similar fashion as stocks of companies are traded. ETFs, hence, also emulate the nature of a stock market index in that they hold securities. Most ETFs track an index, such as the Standard & Poor's (S&P) 500 , a commodity or other various assets similar to an index fund. Some of the unique features of exchange-traded products are that they come at affordable prices and are tax efficient. Because it trades like a stock, the net asset value (NAV) of an ETF is not calculated every day as in the case of a mutual fund.
The functioning of an ETF
In the case of normal funds, an investor buys and sells units directly from or to the fund manager. The money is first collected from the investors to form the corpus which is used by the fund manager corpus to build and manage the appropriate portfolio. Whenever and investor wants to redeem his units, a portion of the portfolio is sold and gets paid for those units.
