Contact Us 
SMS EDU to 561617 SMS EDU to 561617 Exchange Traded Funds (ETFs) are essentially mutual fund schemes or index funds that are listed and traded on an exchange just like stocks. ETFs can be bought and sold throughout the trading day. Buying/Selling of ETFs is as simple as buying/selling of any other stock on the exchange allowing investors to take advantage of intra-day price movements. Other advantage of ETFs is that you can buy even one unit and hence take exposure of the entire index at very low amounts.
ETFs can be bought and sold just by a call to the broker or through your internet trading account. This provides an opportunity to investors to respond to changes in the market and even place limit orders while trading.
Thus with ETFs, one can benefit both from the flexibility of a stock as well as diversification of an open ended mutual fund scheme.
ETFs offer several advantages to investors : -
Can easily be bought / sold like any other stock on the exchange through terminals across the country.
Buy / Sell at real-time prices
Ability to put limit orders.
No separate form filling, delivery in your demat account.
Minimum investment is one unit.
Lower Expense ratio in comparison to index funds?
No STT on purchase of units, STT on sale of ETFs is 0.001%, which is lower than stocks
Risk Reduction :
Elimination of non- systematic risks (company / industry specific risk)
Investing in an index fund eliminates the risk of stock picking and portfolio manager selection
Broad Diversification :
Exposure to segments of markets, sectors and also entire markets
Easier to buy & sell index fund versus individual stocks
Asset Allocation :
Indices across asset classes (equity, fixed income, gold, etc.)
Easy to build & track portfolio
Benefit from expert opinion :
Actions of a large number of market participants leads to price discovery & index investors can aim to benefit from this collective wisdom at a low cost.
While the expense ratio of ETFs is generally low, there are certain costs that are unique to ETFs. Since ETFs, like stocks, are bought as shares through a broker, every time an investor makes a purchase, he/she pays a brokerage commission. In addition, an investor can suffer the usual costs of trading stocks, including differences in the ask-bid spread etc. Of course, traditional mutual fund investors are also subjected to the same trading costs indirectly, as the fund in turn pays for these costs.
ETFs have a very transparent portfolio holding and predefined creation basket. This allows arbitrageurs to create and redeem units every day through the in-kind creation / redemption mechanism. Such arbitrageurs are always in the market to take advantage of any significant premium or discount between the ETF market price and its NAV by doing arbitrage between the ETF and its underlying portfolio.
Thus, the open architecture of ETFs ensures that there is no significant premium or discount to NAV. At the same time, additional demand / supply is absorbed due to the action of the arbitrageurs.
ETFs derive their liquidity in two following ways:
Trading of ETF units on the NSE / BSE
Directly with the Fund through the in-kind creation / redemption process with the fund in creation unit size
Due to the unique in-kind creation / redemption process of ETFs where underlying basket of securities are purchased / sold, liquidity of an ETF is the liquidity in the underlying shares.
Buying / selling ETFs is as simple as buying / selling any other stock on the exchange. ETFs allow investors to take benefit of intra-day movements in the market, which is not possible with open-ended funds. With ETFs one pays lower management fees. As ETFs are listed on the exchange, distribution and other operational expenses are significantly lower, making it cost effective. These savings in cost are passed on to the investor. ETFs have lower tracking error due to the in-kind for creation and redemption.
ETFs v/s Stocks & Mutual Fund Units
| Functionality | ETFs | Stocks | Mutual Fund Units |
|---|---|---|---|
| Real time trading and pricing throughout market hours | YES | YES | NO |
| Ability to put limit orders | YES | YES | NO |
| Can be traded real time on the Stock Exchange | YES | YES | NO |
| Is Arbitrage possible between Futures and Cash Market | YES | YES | NO |
| Is Diversification possible with a single unit | YES | NO | YES |
| Returns at par with the market/ Index | YES* | NO | NO |
| Intra day trading | YES | YES | NO |
| Exit Load | NO | NO | YES |
* subject to tracking errors
Asset Allocation : Studies have shown that Asset Allocation is what drives long-term accumulation of wealth as can be seen from the following chart below: Until recently however, managing asset allocation could be difficult for individual investors given the costs and assets required to achieve proper levels of diversification. ETFs provide investors with exposure to broad segments of the equity markets. They cover a range of style and size spectrums, enabling investors to build customized investment portfolios consistent with their financial needs, risk tolerance, and investment horizon.
Both institutional and individual investors use ETFs to conveniently, efficiently, and cost effectively allocate their assets.
Cash Equitisation :Investors typically seek exposure to equity markets, but often need time to make investment decisions. ETFs provide a "parking place" for cash that is designated for equity investment. Because ETFs are liquid, investors can participate in the market while deciding where to invest the funds for the longer-term - thus avoiding potential opportunity costs.
Core-Satellite Strategy :ETFs can help to increase diversification within an investment portfolio. The ‘core’ of ETFs provides a way to reduce the running costs of a portfolio without deviating too much from the benchmark.
The remaining part of portfolio ‘satellite’ can be actively managed through investment in selected equities or actively managed assets such as other ETFs or mutual funds. The aim can be to generate ‘alpha’ through picking investments that may outperform the core portion of the portfolio.
Actively Managing a Longer-Term Portfolio with ETFs :ETFs can be used to create a broad diversifiedportfolio. An investor can use active management strategies by entering and exiting into wide array of ETFs across themes, sectors and asset classes, instead of simply using buy and hold passive management strategy.
Active Trading with ETFs : ETFs trade intraday, like stocks or bonds; they can be bought and sold real-time in response to market movements. ETFs can be used as the perfect vehicle to move frequently in and out of an entire market or a particular niche segment.
Arbitrage (Cash Vs Futures) and Covered Option Strategies : ETF's can be used to arbitrage between cash and futures market, as it is very easy to trade. ETF's can also be used for cover option strategies on the index.
Constituents of an index are changed as and when securities in the index do not match specific criteria laid down by the index service provider. The index service provider usually makes announcements of change well in advance. Once securities in the underlying index are changed, the fund would change the securities in its underlying portfolio by selling the securities that are being removed from the index and including those that are included in the index. This will in no way affect the units being held by an investor, as the units will continue to track the index. The only effect may be on the tracking error of the scheme. Index changes are usually made twice a year depending on the index. In India, historically, around 10% of the index constituents have changed annually which means an index of 50 securities would experience about 5 changes every year.
