Over the past few days, the global stock market has seen a steep surge in the demand for Exchange Traded Funds (ETFs), as investors have opened up to this comparatively novel concept in the commodities market. ETFs are securities that are although tracked as a commodity, or an asset, can be traded as any ordinary stock on an exchange. As a result, an ETF’s Net Asset Value isn’t calculated in the same manner as it does for a mutual fund. They experience price fluctuations throughout the period they are bought and sold.
The best advantage that investors receive on ETFs is its diversity, as you get the features of an index fund and the unequivocal freedom to buy, sell, and purchase in any number, all packed together in one power-packed combo! Expense ratios for ETFs are also comparatively lower as compared to mutual funds. Thus, when dealing with ETFs, you can pay your broker the same standard commission that you would pay for any other regular order.
Markets have recorded a steep demand over the past few months for ETFs, especially for Gold Exchange Traded Funds, due to the ever increasing demand for gold in the market. Although a slight fall in the price of gold has been recorded, many market analysts believe that this fall is only a temporary phenomenon, and a steep decline in prices is nothing but an Utopian dream for gold shoppers. Thus, takers for Gold Exchange Traded Funds are increasing by the day, with many investors showing keen interest on this precious marketable commodity.
The advantages for Gold Exchange Traded Funds doesn’t stop right here. Besides pricing transparency, high-level convenience, affordability, high liquidity, and easy trading procedures, if dealt with smartly, investors can acquire unlimited added bonuses. As for any marketable commodity, ETFs need to be dealt with much care and precaution. One of the main reasons behind this may be a dearth in trading volume, since the ETFs as a whole, are a relatively new concept to reach the shores of the Indian stock market. It will take some time before traders and brokers sufficiently equip themselves with the required knowledge to deal with this push product of sorts. Thus, people who have already purchased ETFs may suffer with issues of low trading volume. This may lead to problems like high impact cost, caused due to the absence of liquidity prospects in buying and selling prices, in the transaction of ETFs. Thus, investors tend to lose an increased amount of money every time the gap in purchase and sale prices increase, forcing them to borrow debt like a loan or a personal loan to finance their requirements. The phenomena of losing money is because in a market where low demand and volume persists, you can end up buying ETFs at a price much higher that desirable, forcing you to sell it at a price less than what you would like. Even then, you may not find many buyers, or sellers, willing to purchase them at a price you would like to trade, thus, damaging your expectation of overall returns and reducing your estimated profits.
There may also be a huge difference between the Net Asset Value and the market price of the ETF, due to lack of liquidity. Another crisis faced by ETF holders is the lack of exit options, due to which they may encounter difficulties in disposing the ETFs, or worse, they may be stuck with them for a really long time. Thus, although ETFs may be an upcoming trend, investors must exercise precaution while dealing them, so as to extract maximum profitability out of them.