Exchange Traded Funds (ETF) - Meaning And How Do They Work?

Exchange Traded Funds or ETFs provide investors with greater control over their investments while offering diversification benefits at a lower cost compared to traditional investments. They offer access to global markets, and different asset classes, and can be bought and sold intraday as well. ETFs are a great way for investors to get started with investing and add diversification to their existing portfolios.

ETFs – What are Exchange Traded Funds?

Exchange Traded Funds (ETFs) allow investors to gain exposure to stocks, bonds, and other asset classes globally in one investment vehicle.

Exchange Traded Funds are passive investments, meaning they track a particular index or benchmark and are made up of pre-selected securities that match the performance of the underlying index.

Types of ETFs

  • Commodity ETFs:

    Commodity Exchange Traded Funds track the price movements of commodities such as oil, gold, and silver. They are traded on the same exchanges as stocks and provide exposure to the price movements of these commodities without having to physically own them.
  • Currency ETFs:

    Currency Exchange Traded Funds track currency exchange rates, allowing investors to gain exposure to foreign currencies without having to purchase them. These ETFs can be used for hedging against foreign currency risk or speculation on future currency trends.
  • Bond ETFs:

    Bond Exchange Traded Funds track the performance of bonds, such as government bonds or corporate bonds. These ETFs provide diversification and income potential to a portfolio, with lower costs than buying physical bonds.
  • Sector ETFs:

    Sector Exchange Traded Funds track specific sectors of the economy, such as banking, technology, or energy. They allow investors to gain exposure to these sectors without having to buy individual stocks.
  • Equity ETFs:

    Equity ETFs offer investors the ability to diversify their equity investments across different sectors, regions, and market capitalizations. For example, an ETF may invest in a range of stocks from small-cap companies located in the US, Europe, and Asia. This gives investors exposure to a broad range of markets and helps reduce the risk associated with investing in any one particular sector or geography.
  • Gold ETFs:

    Gold ETFs provide investors with a simple, cost-effective way to gain exposure to the gold market without actually owning physical gold. Unlike gold coins or bars, which require storage and insurance, gold ETFs are easy to buy and sell on major stock exchanges. They track the spot price of gold and provide access to international markets. Gold ETFs also offer diversification benefits due to their low correlation with other asset classes, making them an attractive investment option for portfolio diversification.

How Do Exchange Traded Funds (ETFs) Work?

Exchange Traded Funds are bought and sold through exchanges just like stocks. An investor can purchase or sell ETFs in the exchange during the market hours. The price of an Exchange Traded Fund is determined by its underlying assets, current supply, and demand, as well as other factors.

How To Buy and Sell ETFs?

With proper research and monitoring, you can maximize your potential returns. Here are steps to buy and sell ETFs more confidently.

  • Get familiar with Exchange Traded Funds:

    Before investing, it is crucial to understand how ETFs work and their advantages and disadvantages.
  • Select an ETF:

    Choose an ETF that aligns with your investing goals. Consider factors such as the level of risk, liquidity, fees, and performance of the ETF before selecting.
  • Open a Demat & Trading account:

    You will need to open a Demat & Trading account to buy and sell Exchange Traded Funds.
  • Place an order:

    After opening Demat & Trading account, you can buy or sell ETFs online.
  • Monitor your investments:

    After placing an order, you will need to monitor the ETF performance and make adjustments or book profits when necessary. It helps ensure that you get the most out of your investment.

Advantages and Disadvantages of ETFs

Low cost, intraday trading flexibility, and diversification are just some of the benefits that ETFs offer. However, it is crucial to understand these in detail.


  • ETFs are generally lower cost – ETF follows an index or a variety of stocks that can be costly if bought individually. Therefore, ETF is a lower cost alternative to diversify investments.
  • Exchange Traded Funds also allow you to trade intraday, giving more flexibility in trading.


  • Since ETFs are transacted similarly to stocks, there is a brokerage cost associated with buying and selling every time.


ETFs can be an appropriate choice for experienced investors looking to diversify their portfolio at a lower cost. However, one must research and understand the risks before investing in ETFs. With Bajaj Financial Securities Limited, you can easily invest in ETFs with ease and convenience. Why wait? Open your Demat & Trading account today and start investing in ETFs. Visit our website now to get started!

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Frequently Asked Questions (FAQs)

Leveraged ETFs use derivatives or borrowed money to increase exposure to some asset classes. These Exchange Traded Funds cater to investors looking for enhanced returns in a short period. However, they come with an increased risk and should be used only by investors with good experience in the market. Leveraged ETFs can be very volatile and require careful monitoring to minimize the loss.

Some popular Exchange Traded Fund strategies are ETF rotation strategies, ETF asset allocation strategies, and ETF arbitrage strategies.

  • ETF rotation strategies involve investing in ETFs that are expected to outperform the market in the short term.
  • ETF asset allocation strategies help create an ETF portfolio with a mix of different asset classes based on the investor's risk tolerance.
  • ETF arbitrage involves the simultaneous buying and selling of ETFs to capture short-term profits.

ETF is ideal for those who want a cost-effective way to diversify the portfolio. ETFs are suitable for diversifying investments across various asset classes or track specific index.

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