What are Index Tracking ETFs? How Does Index Tracking ETFs Works?

An ETF tracking index is an exchange-traded fund that tracks a particular stock market index. It is an investment instrument that provides more stable returns than the stock market. They are also affordable ways to invest in major market indices since you do not need to tie up the bulk of your capital in these ETFs.

What are Index Tracking ETFs?

Investing in individual stocks can be tiresome as you have to constantly buy and sell them based on their favourable or unfavourable price movements. If you buy exchange-traded funds (ETFs), it is like having a basket of different stocks. These ETFs can track different assets. Some may track commodities like oil and precious metals (like gold), while others may track entire stock market indices.

If you invest in ETFs that track stock market indices, then it is like owning a shopping cart that has different types of stocks and assets belonging to that one particular stock market index. For example, in India, you can purchase ETFs tracking major indices like the Sensex and Nifty 50.

How Do Index Tracking ETFs Work?

An ETF that tracks a stock market index works by mirroring the performance of major market indices. These ETFs can give you a taste of all types of assets while spreading your risks across these different asset classes.

For example, if you buy an ETF that tracks the Nifty 50 stock market index, its value will increase or decrease based on the corresponding price movements of the entire Nifty 50 index. So, an ETF tracking index like the Nifty 50 can help you prevent overcomplication of your portfolio by keeping all your favourable assets within the same ETF.

Why Should You Consider Index ETFs?

Some of its benefits of investing in Index ETF include:

• Diversification: Increased diversification leads to the spreading of risk across your portfolio, thereby minimising it.
• Affordability: The management fees are lower than mutual funds which can help you preserve your capital.
• Convenience: Since these ETFs mirror major market indices and have a basket of different asset classes, you no longer need to actively manage your portfolio.

Conclusion

So, if you are looking for a method to do passive investing and that too, on a tight budget, then ETFs that track major indices can be the way forward. Since these ETFs are professionally managed and have several asset classes, you can buy these and tap into the potential gains from favourable stock market performances.