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May 01, 2023


Question 1

ETFs (exchange traded funds) are marketable securities that monitor and attempt to mimic the performance of an index. An Exchange traded fund also tracks commodity, index, sector and other assets as well. One of the benefits of the ETFs are that it can be molded and constructed in such a way that it can track the price of an individual commodity and or a combination of multiple securities. It exhibits features similar to a stock and as well as mutual funds in several ways. It`s comparable to a stock in that it`s traded on a stock market, and it`s similar to a mutual fund in that it`s made up of several individual assets (Madhavan 2016). The fundamental difference between an ETF and a mutual fund is that the net asset value of an ETF is not determined at the end of the day like it is in a mutual fund. An ETF can have a variety of benefits and drawbacks which are discussed below.

 In terms of operations and management, ETFs are less expensive than index funds. ETFs offer flexibility since they are comparable to stocks and are exchanged on the securities exchange like regular stocks. Specific characteristics associated with stocks, such as purchasing on margin (using borrowed money from the broker), stop and limit orders if authorized by the broker, and selling short of shares (depending on stock exchange limits), are also accessible in the case of ETFs. ETFs are considered to be liquid as they are exchange traded and this acts as an advantage to the investors (Madhavan and Sobczyk 2016). Because ETFs are available for various indexes, track several benchmarks, engage in diverse markets, and monitor specific asset classes which includes large cap industries, small capitalization industries, middle capitalization industries. One has to pay commission fees and maybe extra brokerage costs when you purchase and sell ETFs. This is one of the most significant drawbacks for investors looking to save costs. There is no guarantee that the market price of an ETF will correspond to the market price of its underlying assets. Price volatility is comparable to that of stocks, reducing the factor of diversity.  The majority of publicly listed ETFs are now passively managed, leaving investors with little choices for boosting gains or reducing losses through portfolio building. Many ETF providers provide poor customer service. This is particularly worrisome for new investors or elderly persons who are unable to grasp the complexities various investment alternatives and kinds available. There are a variety of ETFs that pay monthly dividends, but the yield given by ETFs is often smaller than the dividend yield of a stock. Investing in ETFs is less hazardous than investing in stocks, but if an individual is ready to take on more risks, higher returns can be obtained by the individual in that case (Israeli, Lee and Sridharan 2017).

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