ETFs are index funds investing in a basket of securities that mostly track a certain index to mirror its return, i.e., the underlying portfolio of ETFs follow a certain index
An ETF is called an exchange-traded fund because it’s traded on an exchange just like stocks are. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange, and which trade only once per day after the markets close. Additionally, ETFs tend to be more cost-effective and more liquid compared to mutual funds.
ETFs are diversified funds that are listed and traded on exchanges, it looks like a MF but traded like stocks
As per the trigger of 2015 EPFO start of Investment, the stats of ETF’s volume growth to approximately 30 times in 2020 as compared to 2015 and also the number of ETF’s surge to 82 from 36 in the same year zone.
EXPENSE RATIO COMPARISON:
Well, the expense ratio of actively managed MF is around 1%-2%. While, Index Funds have it around 0.25%-0.5%, and lastly the ETFs had an expense ratio of around 0.05% – 0.1%.
PARAMETERS TO CHECK WHILE SELECTING ETFs:
Following are the point one should keep in check while picking the ETFs
- Total Expense Ratio (TER) = It has to be low
- Tracking Error = it is a difference between index return and ETF return, it also has to be low
- Liquidity = It is one of the important checkpoints, selected ETF must have enough liquidity so that individual can exchange their position in an easy way.
POPULAR ETF CATEGORY:
- INDEX ETF
- GOLD ETF
- BANK ETF
- INTERNATIONAL ETF
- LIQUID ETF
BENEFIT OF INVESTING IN ETFs:
- Liquidity Exchange traded funds can be sold and bought at any time throughout the trading period.
- Low cost ETFs make an affordable investment due to their lower expense ratios than a Mutual Fund.
- Tax Advantage Buying and selling of shares in the open market do not impact the exchange-traded fund’s tax Obligation. This is the reason exchange-traded funds are tax-efficient.
- Transparency There is a high level of transparency in ETFs as the investment holdings are published every day.
- Exposure Exchange-traded funds provide diverse exposure to specific sectors as the case may be.
Anand Pandey (Bourse Academy)