Exchange-Traded Funds (ETFs)

An exchange-traded fund (ETF) is a collective investment scheme (fund) whose units are LISTED on a stock exchange. Unlike a traditional unit trust — which an investor buys or redeems from the manager once a day at a forward-priced NAV — an ETF trades throughout the day like a share.

Most ETFs are designed to TRACK a benchmark, typically a market index (equities, bonds, commodities or a basket), so the investor gets diversified, index-style exposure in a single listed instrument.

Two prices matter for an ETF and they are not the same thing:

• •The NET ASSET VALUE (NAV) — the per-unit value of the fund's underlying holdings, the fund's 'fair' value.
• •The MARKET PRICE — the price at which units actually change hands on the exchange, set by supply and demand between buyers and sellers.

The market price trades intraday and moves continuously; it normally stays CLOSE to NAV, but can trade at a small PREMIUM (above NAV) or DISCOUNT (below NAV). The creation/redemption mechanism is what keeps the two tightly aligned.

TRADING & PRICING: an ETF trades intraday at a live market price through a broker; a traditional open-end fund deals once a day at a single NAV struck at a cut-off (forward pricing).

ACCESS: buying an ETF means buying existing units from another investor on the exchange (secondary market); buying a traditional fund means the manager CREATES new units for you (primary subscription).

COST STYLE: ETFs are typically low-cost, passive index trackers with a management/expense ratio; the investor also pays a bid-offer spread and brokerage, but usually no front-end sales charge.

TRANSPARENCY: an ETF's holdings and its tracked index are generally disclosed, so investors can see what the fund is meant to hold.