“ETFs or Exchange Traded funds are similar to index mutual funds. However, they trade just like stocks.”
In 1990 the world’s first ETF was created in Canada, transforming the investment landscape & offering the advantages of pooled investing & trading flexibility. Demand continues to grow as both retail & institutional investors depend on ETFs. The first ETF in the United States was Launched in 1993.
ETF stands for Exchange Traded Fund, & just like a Stock, it is traded on stock exchanges such as NYSE & NASDAQ. But unlike a stock, which focuses on one company, an ETF tracks an index, a commodity, bonds, or a basket of securities. ETFs were started in 2001 in India.
ETFs are securities that closely resemble index funds, but can be bought and sold during the day just like common stocks. These investment vehicles allow investors a convenient way to purchase a broad basket of securities in a single transaction. Essentially, ETFs offer the convenience of a stock along with the diversification of a mutual fund.
An exchange-traded fund is a marketable security, meaning it has an associated price that allows it to be easily bought and sold. ETF combine the range of a diversified portfolio with the simplicity of trading a single stock.
There are numerous advantages to ETFs, especially when compared to their mutual fund cousins.
Diversification
Diversification is another key benefit that an investor derives from ETF investments. Firstly, one can potentially choose from a wide range of ETFs which mainly differ on the basis of the underlying asset such as gold, equity or index funds. Further, certain ETFs such as an equity ETF will save you from concentration risk as it would invest its funds in a diversified portfolio of equity stocks. An ETF can track a broader range of stocks, or even attempt to mimic the returns of a country or a group of countries.
Cost Efficient
ETF is a cost-efficient product and often considered unique because of the low expense ratio. A lower fund management fee can generate incremental savings and therefore, increase payouts in the long term. ETF shareholders don’t need to pay a manager and a team of analysts and brokers to buy and sell funds on their behalf, nor to manage fund inflows and outflows, exchange traded funds typically have much lower expense ratios than traditional mutual funds.
Flexibility
Speaking of flexibility, like an equity, ETFs trade throughout market hours. ETFs can be sold short or on margin, and prices are continuously updated during the trading day. In other words ETFs trade just like equities on the stock market.
Lower Fees
ETFs, which are passively managed, have much lower expense ratios compared to actively managed funds, which mutual funds tend to be. What drives up a mutual fund’s expense ratio? Costs such as a management fee, shareholder accounting expenses at the fund level, service fees like marketing, paying a board of directors, and load fees for sale and distribution.
Can Be Purchased in Small Amounts:
Since ETFs trade like stocks there are advantages for position sizing. Small positions can be purchased (no minimum investment) to scale in or scale out of a position, or take a single small position in a particular ETF.
Investors need to have a demat & a trading account. Mainly holds large capitalization stocks. Attract longer term investors; Intraday trading is not required. For larger corporations, direct investment in an index can be a perfect substitute for an ETF. Alternatively, an investor may have a lower cost & lower taxes.
They have to pay a brokerage (usually around 0.35% to 0.99%). This is considered high for a new short-term investor.
Intraday Pricing Might Be Overkill
Longer-term investors could have a time horizon of 10 to 15 years, so they may not benefit from the intraday pricing changes. Some investors may trade more due to these lagged swings in hourly price. A high swing over a couple hours could induce a trade where pricing at the end of the day could keep irrational fears from distorting an investment objective.
TAX IMPLICATIONS
For ETFs which invest beyond the traditionally popular asset classes of equities and fixed income, investors need to exercise caution as apart from an increased tracking error, tax implications may be high at best or unclear at worst, which may have a sizable impact on returns.
Over Diversification
Many ETFs participate in over diversification. ETFs are generally not actively managed, but are programmed to follow a specific index. The index, and therefore the ETF, may not own the very best stocks.
It may be more advantageous to buy a limited number of the best companies rather than own the entire index. This would be particularly true with ETFs that track indices with a small universe of stocks such as a specific sector or industry.
Intraday Pricing Might Be Overkill
Longer-term investors could have a time horizon of 10 to 15 years, so they may not benefit from the intraday pricing changes. Some investors may trade more due to these lagged swings in hourly price. A high swing over a couple hours could induce a trade where pricing at the end of the day could keep irrational fears from distorting an investment objective.
- You have to find a good online broker. Then open . And decide which ETFs you want to buy. Then place an order with Broker.
- Broker enters the order to be filled in the market
- Order is filled in the market .
- Broker deliver ETF shares to the Investor. Monitor your ETF position regularly.
The biggest difference between mutual fund & ETF is that Mutual Funds trade at the end of the day, while ETFs trade intraday Stock orders can be made with ETFs but not with mutual funds. ETFs often have lower expenses ratio than mutual funds.
| MUTUAL FUND | ETFs |
| Professionally managed investment vehicle, where the resources from multiple investors are collected and traded is known as Mutual Fund. | The ETF is a investment scheme that tracks the index, and are listed & traded on a stock exchange. |
| Mutual Fund have varying operating expenses. | ETF has lower operating expenses. |
| Mutual Fund have more tax liabilities than ETFs. | ETFs offer tax benefits to the investors due to the manner of its creation & redemption |
| Doesn’t need Demat account. | Needs Demat account. |
| Can buy or sell the shares only once a day, i.e. after closing the trade. | Can buy or sell shares at any time from anywhere & as much times as you want. |
| Pricing based on closing NAV. | Intraday pricing. |
| Potentially higher capital gain distributions due to fund structure. | Generally lower to no capital gain distributions. |
| No traded options available | Ability to trade options sometimes. |
| Transactions take place between the investors & the fund itself. | Traded on exchange. |
Also Read | What is MACD in Stock Market
Post Views: 2,416
