Exchange-Traded Funds

An exchange-traded fund (ETF) is a collective investment scheme (fund) whose units are LISTED and traded on a stock exchange, so investors buy and sell them through a broker like ordinary shares rather than dealing directly with the fund manager.

Most ETFs are PASSIVE index funds: instead of a manager picking stocks to beat the market, the ETF simply aims to TRACK a chosen benchmark index (for example a broad equity index, a bond index, or a commodity/gold price) as closely as possible.

It combines features of two familiar products — the DIVERSIFICATION and pooling of a unit trust/mutual fund, with the intraday TRADABILITY and price transparency of a listed share.

Because it is a plain, transparent, index-tracking fund that a retail investor can readily understand, a straightforward ETF is treated as an Excluded Investment Product (EIP) rather than a complex Specified Investment Product (SIP).

A conventional (non-listed) fund is dealt ONCE a day at a forward NAV — the net asset value struck after the market closes. An ETF, by contrast, can be BOUGHT and SOLD at any time while the exchange is open, at a live market price that moves during the day.

The fund's NAV per unit is the market value of its underlying holdings, less liabilities, divided by units in issue. An ETF's traded price is set by supply and demand in the market, but is kept CLOSE to NAV — it normally trades at only a small premium or discount to the fund's underlying value.

The mechanism that keeps price near NAV is ARBITRAGE by large market participants (see primary market below): if the price drifts too far from the value of the underlying basket, they can profit by creating or redeeming units, which pushes the price back toward NAV.

Many ETFs also publish an indicative NAV (iNAV) during the trading day, so investors can compare the live traded price against an estimate of fair value.