What are Exchange Traded Funds (ETFs)? Introductory Guide

Exchange Traded Funds (ETFs) are modern financial instruments that offer investors the opportunity to invest in a broad basket of stocks or a specific commodity with a single transaction. While classic mutual funds are priced only once a day and buy-sell transactions take place at the end of the day, exchange-traded funds can be bought and sold instantly on the stock exchange during session hours just like a stock. Thanks to these features, ETFs offer both the risk diversification provided by fund management and the liquidity and speed provided by stock transactions.

There are various ETFs traded in Borsa Istanbul. The most popular of these are funds tracking the BIST 30 or BIST 100 index. For example, when you buy a BIST 30 index fund, you partner with Turkey's largest 30 companies in proportion to their weights, with a single stock transaction fee. In addition, there are ETFs tracking commodities like gold and silver, or targeting specific sectors like banking and technology. Investors can easily diversify their portfolios using these funds according to their expectations.

One of the biggest advantages of ETFs is low management fees. Compared to actively managed classic mutual funds, annual management expense ratios of ETFs passively tracking a specific index are very low. This provides a cost advantage in long-term investments. Also, ETFs are highly transparent; the portfolio structure of the fund and the distribution of stocks in it are disclosed to the public every day. Investors know instantly how much of which company is in the fund. Tax advantages are another issue attracting investors in some ETF types.

One of the issues to pay attention to when trading in exchange-traded funds is the liquidity of the fund and its relationship with the indicative net asset value (iNAV). The transaction price of the fund on the stock exchange should be very close to the real value of the assets in the fund (net asset value). If the difference widens, market maker institutions step in and balance the price through arbitrage. Investors should prefer ETFs with high transaction volume and strong liquidity. In low-volume funds, the spread between bid and ask prices can be wide, which can create costs for short-term trading.

On our Sermaye Borsasi Telegram channel and education portal, we explain in detail the role of exchange-traded funds in portfolio creation and their usage strategies. ETFs are a great alternative for investors who have difficulty choosing individual stocks or cannot allocate enough time to track the stock market. Distributing risk with index funds instead of tying all eggs to a single stock is the guarantee of your financial peace. As Sermaye Borsasi, we recommend our investors to get to know the ETF world closely.