An Exchange Traded Fund is a bouquet of investment fund containing all or some instrument such as stocks, gold, or bonds. ETF is very similar to mutual funds, but listed in the stock exchange. Just like how the share price of a company changes, its price also fluctuates.
In general, the demand and supply of any product drives its price . However, the changes in the pricing of an ETF is slightly different. However it is proportionate to the price of its underlying securities. Again, the same principle of Mutual fund NAV applies here.
For example, ICICI Prudential Nifty 50 invests exclusively in the Nifty 50 companies. So, the price of this fund is proportional to the price of the Nifty 50 companies. Investing in it is as good as investing in all the 50 companies constituting the Nifty. The value is based on the value of Nifty 50 companies.
Bharat bond ETF is another example of ETF. As reported by moneycontrol, It is the first ever government approved corporate bond ETF. Majorly driven to generate liquidity for the Govt owned companies like BPCL, ONGC, NALCO etc.
In both cases, the value of the dividend received by the shareholders of ETFs depends upon the performance and asset management efficiency of the fund house. This offers diversification by default.
Since the investment spreads across different companies, risk is diluted. Its expense ratio is also considerably lower, making it more attractive to the investors. It’s an appealing option for investors with limited stock market expertise. Like mutual fund, ETFs are also of various types