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Final Draft (1)

Final Draft (1)



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Published by MRINAL KUMAR

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Published by: MRINAL KUMAR on Mar 25, 2011
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Exchange Traded Funds (ETFs) are mutual fund units which investors buy/sell from the stock exchange, as against a normal mutual fund unit, where the investor buys /sells through adistributor or directly from the AMC. Practically any asset class can be used to create ETFs.Globally there are ETFs on Silver, Gold, and Indices. Gold ETFs are a special type of ETF whichinvests in Gold and Gold related units. Investors can buy G-ETF units from secondary marketseither from the quantity being sold by the APs or by other retail investors. Retail investors canalso sell their units in the market. Exchange Traded Funds (ETFs) are open ended mutual fundsthat are passively managed and most of them seek to mirror the return of an index, a commodityor a basket of assets. ETFs are listed and traded on stock exchanges like stocks. They enableinvestors to gain broad exposure to indices or defined underlying asset (commodity) with relativecase, on a real-time basis, and at a lower cost than many other forms of investing. Gold backedExchange Traded Funds (ETFs) are units designed accurately to track the gold price. ETFliquidity is supported by large professional market makers and dealers, in the normal way of providing liquidity on the relevant stock exchange. Additionally there is the facility to create andredeem new units ± on demand.
ETFs are just what their name implies: baskets of units that are traded, like individual stocks, onan exchange. Unlike regular open-end mutual funds, ETFs can be bought and sold throughout thetrading day like any stock. Most ETFs charge lower annual expenses than index mutual funds.However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be asignificant drawback for those who trade frequently or invest regular sums of money. ExchangeTraded Funds (ETFs) are open ended mutual funds that are passively managed and most of themseek to mirror the return of an index, a commodity or a basket of assets. ETFs are listed andtraded on stock exchanges like stocks. They enable investors to gain broad exposure to indices or defined underlying asset (commodity) with relative case, on a real-time basis, and at a lower costthan many other forms of investing.Gold ETFs provided investors a means of participating in the gold bullion market without thenecessity of taking physical delivery of gold, and to buy and sell that participation through thetrading of units on stock exchange. Gold ETF would be a passive investment; so, when goldprices move up, the ETF appreciates and when gold prices move down, the ETF loses value.Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, beforeexpenses, closely correspond to the returns provided by physical Gold. Each unit isapproximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also providea unit which is approximately equal to the price of ½ gram of Gold. They first came intoexistence in the USA in 1993. It took several years for them to attract public interest. But oncethey did, the volumes took off with a vengeance. Over the last few years more than $120 billion(as on June 2002) is invested in about 230 ETFs. About 60% of trading volumes on theAmerican Stock Exchange are from ETFs. The most popular ETFs are QQQs (Cubes) based onthe Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCIIndices and TRAHK (Tracks) based on the Hang Seng Index. The average daily trading volumein QQQ is around 89 million shares. Their passive nature is a necessity: the funds rely on anarbitrage mechanism to keep the prices at which they trade roughly in line with the net assetvalues of their underlying portfolios. For the mechanism to work, potential arbitragers need tohave full, timely knowledge of a fund's holdings.
Both retail and institutional investors have found ETFs to be excellent investment vehicles.Across all types of investors, there are a number of key characteristics that make ETFs attractive,most notably:‡
Continuous, Intraday Pricing
: In sharp contrast to traditional mutual funds, ETFs trade onexchanges throughout the day. As a result, pricing is continuously updated. On manyexchanges, pricing is available in bonds.‡
Access to indicators and Indexes
: Since each ETF share represents a fraction of a basket of units, ETFs provide simple, low-cost access to numerous indicators and industries (e.g.,Telecommunications), as well as popular indexes (e.g., S&P 500). ETFs also provide manyopportunities for style investing ± growth, value, core, etc.‡
Ability to Track an Entire Market Segment
: The core guiding principle of an ETF fundmanager is to track the underlying index as closely as possible. As a result, ETFs provideinvestors with a simple, transparent and accurate means of tracking a complete marketsegment.‡
Diversity in Investment Opportunities
: Managing around the fate of single stocks is animportant part of many individual and institutional investment strategies. ETFs, through their expansive underlying basket of units, allow instant portfolio diversification.‡
Low Expense Ratios
: Unlike actively managed mutual funds that charge high fees for fundmanager expertise, marketing, and high levels of fund retooling, ETFs inherently have lowexpense ratios because of limited fund manager decision-making.‡
Tax Efficiency
: In the U.S., the most successful ETFs provide excellent tax efficiency throughlow turnover rates, as well as the unique in-kind creation and redemption process that shieldsinvestors from capital gains associated with cash-outs.‡
: ETFs demonstrate a high level of transparency because they are based on well-published fund holdings ± these are most commonly a basket of equities that track an index.‡
Equalize Cash
: Both institutional and retail investors find ETFs to be a low-cost option for parking excess cash in the broad stock market.‡
Portfolio Risk Management
: Unlike traditional mutual funds, ETFs support market, limit, andshort trading, as well as derivative products such as options and futures.

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