Exchange Traded Funds: Key characteristics and selection criteria

Exchange Traded Funds (ETFs) function as investment trusts that are traded on stock exchanges, similar to individual shares. Unlike traditional mutual funds, ETFs allow investors to buy and sell through market orders or limit orders during specific exchange trading hours.

Key considerations for investors include management fees, known as trust fees, and the distinction between market price and the net asset value (NAV). Because market prices are driven by supply and demand, they may deviate from the underlying asset value. Investors are advised to compare trust fees, trading units, and liquidity across different products.

When selecting an ETF, investors often evaluate replication methods. Physical ETFs hold the actual underlying securities, whereas synthetic ETFs use swap contracts with partner banks to replicate index performance. ETFs are widely used for diversification, as a single fund can provide exposure to hundreds of different assets with lower management costs compared to actively managed funds.