What are Exchange Traded Funds?
ETFs represent shares of ownership in either
fund, unit investment trusts, or depository
receipts that hold portfolios of common stocks
which closely track the performance and dividend
yield of specific indexes, either broad market,
sector or international. ETFs give investors the
opportunity to buy or sell an entire portfolio
of stocks in a single security, as easily as
buying or selling a share of stock. They offer a
wide range of investment opportunities. While
similar to an index mutual fund, ETFs differ
from mutual funds in significant ways. Unlike
Index mutual funds, ETFs are priced and can be
bought and sold throughout the trading day.
Furthermore, ETFs can be sold short and bought
on margin.
Have you ever wished you could buy every stock
represented in a high profile index such as the
NSE Nifty, or the BSE Sensex but the cost of
buying each stock represented in such an index
was prohibitive?
Now, single securities, known as Exchange Traded
Funds (ETF), can track the performance of a
growing number of different index funds
(currently the NSE Nifty). Most ETFs represent a
portfolio of stocks designed to track one
specific index. ETFs can be bought and sold
exactly like a stock of an individual company
during the entire trading day. Furthermore, they
can be bought on margin, sold short or bought at
limit prices. Exchange traded funds can help
investors build a diversified portfolio that’s
easy to track.
ETF Comparison -
While similar to an index mutual fund,
ETFs differ from mutual funds in
significant ways.
|
|
Attribute |
ETF |
Index
Mutual
Fund |
Individual
Stock |
| Diversification |
Yes |
Yes |
No |
| Traded throughout the day |
Yes |
No |
Yes |
| Can be bought on margin |
Yes |
No |
Yes |
| Can be sold short |
Yes |
No |
Yes |
| Tracks an index or sector |
Yes |
Yes |
No |
| Tax efficient as turnover is low |
Yes |
Possibly |
No |
| Low Expense Ratio |
Yes |
Sometimes |
Not a factor |
| Trade at any brokerage firm |
Yes |
No |
Yes |
EFTs trade like shares while providing the diversification of managed
funds. Their performance closely tracks the
investment returns of the shares making up the
index.Advantages
Trading
Flexibility
One key advantage that ETFs have
over traditional mutual funds is trading
flexibility. ETFs trade throughout the day, so
you can buy and sell them when you want.
Costs
In terms of the annual expenses
charged to investors, ETFs are considerably less
expensive than the vast majority of mutual
funds.
Performance
Because they are shielded from investor trading,
ETFs shouldn't suffer from having to keep cash
on hand to meet redemptions, or from being
forced to sell stocks into a declining market
for the same purpose.
Conclusion
ETFs have a lot to offer. They're flexible and
low-cost, and their underlying portfolios are
protected from the impact of investor trading,
making them more tax-efficient than most mutual
funds. There are also ETFs that address specific
subsectors that regular mutual funds do not.
Nevertheless, look carefully before you leap.
ETFs' cost advantage isn't always as large as it
might seem, and trading costs can quickly add
up. Particularly if you're in the market for a
fund that tracks a broad index such as the NSE
Nifty, or if you wish to invest regular sums of
money, it's tough to make a case yet for
choosing an ETF over one of the existing
low-cost mutual-fund options. |
