Exchange-traded fund

A fund whose units are listed and traded on a stock exchange through the day at market prices, usually built to track an index or a commodity such as gold. Buying one needs a demat account and a broker, like buying a share.

Its price can drift from the value of its holdings. Market makers and large investors can create or redeem units against the underlying basket, which pulls the two back together, but in a thinly traded fund the gap can persist. An ETF with an indicative net asset value of ₹250.00 trading at ₹251.50 is at a 0.6% premium, and if you buy it you pay that on top of the expense ratio.

Three numbers decide whether one is good value: the expense ratio, the tracking error against its index, and the bid-ask spread on the exchange.

Check the trading volume before the expense ratio.