Exchange traded fund (ETF) are special types of funds designed to replicate the performance of a specific stock index, commodity prices, or bond index. They do so by investing in the same group of stocks, bonds or commodities in the proper weigh which are used to build the index.
It is almost same as the stock index replicating mutual fund with some difference. Exchange traded funds are mainly the close-end funds which are traded in the secondary market after being issued by the fund management company. The investors can perform all types of trading activities including short selling, margin trading etc. on the exchange traded fund units during the market hours.
The exchange traded fund management companies forms a trustee and manages a well-defined process of creating and redeeming shares to maintain the liquidity in the secondary market. That’s why it is always traded near to the NAV (Net Asset value) value without much premium or discount unlike the normal close-end funds.