You are on page 1of 8

What is Exchange Traded Fund meaning?

Available since 1993 in U.S. and 1999 in Europe, Exchange Traded Fund (ETF) is a marketable
security, that tracks a stock index, a commodity, bonds or a basket of assets. It generally operates
with an investing mechanism designed to keep it switching close to its net asset value. When you
invest in ETFs, your money is spent in a bunch of market securities which are a part of an
established index. Just like the name suggests, ETFs are exchange-traded which means that you
can buy and sell them at any time of the day when the markets are open.

The supply of ETF shares is regulated through a mechanism called Creation and Redemption,
which involves large specialized investors called Authorized Participants.ETF distributor only buys
or sell ETFs from directly from or to authorized participants, i.e. the large broker-dealers with
whom they have made an agreement. Authorized participants may wish to invest in the ETF
shares for long-term, but they usually act as market makers on the open market.

An authorized participant can regain ETF shares by selling them back to the fund’s sponsor.
Selling assets to the ETF sponsor, in return for stocks in ETF is known as Creation. A redemption
mechanism refers to how the market makers of ETF help to coordinate the differences between
net asset value and market values.

While most ETFs track stock indexes, there are also ETFs that invest in commodity markets,
currencies, bonds, and other asset classes. Many ETFs also have an option available for investors
to use income, belief or surrounding strategies.

What is the Exchange Traded Fund for India?


India ETFs comprise of securities traded in India. India’s economy is growing, but it is not entirely
stable and can result in irregularity. The slower pace of economic growth as compared to other
economies has negatively impacted foreign investment. Emerging market investors are keeping
an eye on the U.S. trade policy. However, in long-term, India remains to be of interest to market
investors.

What are the top 5 US-based Exchange


Traded Fund for India?
Following are the top 5 US-based India ETFs:
1. The Direxion Daily MSCI India Bull 3x ETF (INDL)
INDL uses the MSCI India Index as its benchmark.
The fund tries to grow as three times as rate of the index.
This adds a great deal of risk because losses can accelerate in the same way as gains can.

 Avg. volume: 42,460


 Net assets: $97.81 million
 Yield: 0.35%
 2017 return: 128.31%
 2018 YTD return: -12.92%
 Expense ratio (net): 1.04%

2. The Columbia India Small Cap ETF (SCIN)


The stocks in the index are weighted by capitalization.
The fund aims to keep 80% of its assets in securities.

 Avg. volume: 4,752


 Net assets: $21.30 million
 Yield: 0.92%
 2017 return: 64.65%
 2018 YTD return: -23.80%
 Expense ratio (net): 0.86%

3. The iShares MSCI India Small Cap (SMIN)


It aims to achieve the same performance as the MSCI India Small Cap Index.
It may invest in securities that are not in the index but are expected to behave similarly to the
securities that are in the index.

 Avg. volume: 47,822


 Net assets: $282.33 million
 Yield: 2.54%
 2017 return: 60.86%
 2018 YTD return: -14.82%
 Expense ratio: (net) 0.75%

4. The VanEck Vectors India Small Cap ETF (SCIF)


The fund may use depository receipts in addition to investing directly in securities from the index.

 Avg. volume: 45,365


 Net assets: $216.20 million
 Yield: 0.14%
 2017 return: 66.34%
 2018 YTD return: -26.32%
 Expense ratio (net): 0.72%

5. The Columbia India Infrastructure ETF (INXX)


At least 80% of assets go to the companies that are listed in the index.
The main focus is on the companies that are involved in infrastructure. Hence it would be an
investment for those people who think that India is likely to grow its infrastructure to meet the
needs of the world’s second largest population.

 Avg. volume: 9,501


 Net assets: $36.74 million
 Yield: 0.76%
 2017 return: 49.44%
 2018 YTD return: -15.85%
 Expense ratio (net): 0.84%
These five ETFs offer exposure to the emerging market of India. But investment in these ETFs
should be monitored closely because a careful investor can sell shares when returns are no
longer attractive.

What are the types of Exchange Traded


Funds available for Investment?
1. Gold ETF: If you want to invest in gold without worrying about buying physical gold and
storing it safely, then the gold ETF is your best option. It tracks the price of gold.every unit
represents the price of gold, and they are traded on the exchange just like stocks. Few examples
of gold ETFs are –

 SBI Gold ETF


 Kodak Gold ETF
 UTI Gold ETF.
2. Index ETF: With an index ETF, investors gain exposure to numerous securities in a single
transaction. They track the market index. The index works as a tracking instrument and ETFs track
performance of the index by holding shares in its portfolio in the same proportion as the index.
Few examples are-

 SBI ETF BSE 100 (mimics BSE index)


 SPDR S&P 500 ETF.
3. International ETF: They give investors a general idea of the economic condition of the
country. They track the primary market index in the country. Few examples of tracking
instruments are-

 NASDAQ ETF by Motilal Oswal which tracks the NASDAQ index of USA
 HANGSENG BEES by Reliance Nippon which tracks HANGSENG stock index of HongKong

4. Sector Specific ETF: Investors who want to invest in a specific sector opt for this ETF. These
utilize the performance of the industry as a tracking instrument. Depending on the industry you
choose to spend, you will see the value of ETF ranging by the performance of the selected sector.
Example –

 Columbia India Infrastructure ETF.

What is the last one year returns of NIFTY


ETF in comparison compared to nifty index?

The annualized returns (in %) are shown in the pie chart


given below:

A portfolio made up of all Sensex discards since November 2007 generated an annualized return
of 13.8% , while in the case of Nifty, the discards together generated returns of 11.5% annually.
In contrast, the portfolio of stocks added to the Sensex returned a much lower 6.2 %. With the
Nifty, a collection of stocks that were included generated annualized returns of 8%.
Sensex and Nifty follow a pattern of investing, where stocks that have done well in the recent
past are included in the index, while inactive are dropped. As a result, additions are of higher
value.
The Sensex and nifty returned 10.7% annually, using the strategy where an equal amount is
invested in these indices. Sensex/Nifty returns assume investments on the same date as the date
of inclusions/exclusions.

Exchange Traded Funds Vs Mutual Funds


Mutual Fund is like an ETF as it is a unit that comprises the value of different companies. Financial
companies and their fund managers manage a mutual fund. ETF and Mutual Funds differ
concerning:
Costs: ETFs have lower costs than traditional mutual funds. Because it does not have to invest
cash contributions, an ETF does not have to maintain a cash reserve. Mutual Funds can charge up
to 3% while ETFs are always less than 1%.
Taxation: ETFs are structured for tax efficiency and can be more attractive than mutual funds.
Trade: ETF and mutual funds differ concerning traceability. Mutual Fund selling price will be the
price of shares at the end of the day. Whereas, the shares of ETF are traded throughout the day
and can be bought and sold at any moment. In this respect, ETFs have more liquidity and
marketability.

Exchange Traded Fund Liquidity


An attractive feature of ETFs is their ability to be traded throughout the day. The key to a
profitable trading experience is Liquidity. It is a function of the creation and redemption process.
ETFs have a wide range of liquidity. The most active funds are very liquid. In such cases, the
investor usually gets a reasonable price, but that does not mean that less popular funds are not
quality investments.

Exchange Traded Fund Gold

What are the features?


 Transparency: Similar to stocks and shares, gold prices on the stock exchange are
available publicly.
 Cost-effective: The commission charges are very low i.e. 0.5% to 1%.
 Trade: Gold ETFs are easy to trade.
 Lower Risks: Fluctuations in gold prices are generally not so high. Gold ETFs prevent you
from incurring substantial losses.
 Tax Benefits: You do not have to pay VAT, Wealth Tax or Securities Transaction Tax on
them.

How to use Gold ETF?


Gold tends to rise when the dollar is weak, so if your investment portfolio holds assets that have
exposure to the disadvantage of the dollar, then purchasing gold ETF may help you protect that
exposure. Conversely, selling a gold ETF can act as a shield if your portfolio has exposure to the
advantage of the dollar.

What are the disadvantages of Gold ETF?


In some cases and locations, gold ETFs do not have the same tax breaks as exchange-traded
funds have. You never actually own a gold bar or coins. Gold ETFs consists of gold contracts and
derivatives can only be regained for cash, never gold itself.

What are the advantages of ETFs?


1. Cost-effective: They are known to be very cost effective as compared to other funds. This is
because there isn’t a lot of management or expenditure involved in the transactions. They are
economical for a small investor and are known to be cheaper over a long period.
2. Simple: ETFs focus on simplicity. They are transparent and have a simple structure. ETFs are
meant to mimic a particular index, commodity or currency which makes it easier for the investor
to understand how his funds are being allocated. It also helps them to make sure that they are
investing in a fund that meets their asset allocation requirements.
3. Diversification: By mimicking an index, ETFs provide diversification in the investment. There is
no better way to reduce risks than to diversify your funds. ETFs automatically expand the funds
making it easier for us.
4. Management: They do not require active management by the fund manager. They aim at
tracking the index without trying to surpass it. ETFs need to be invested in the same proportion
as the stocks in the index. There are no creative strategies or extra requirements for investment.
This keeps costs on the lower side, and it also ensures that the chances of risks are reduced.

How do you select the right ETFs?


1. The best place, to begin with, is by identifying the benchmark of ETF you are about to buy.
You must dig a little deeper and find what indices the ETFs are tracking.
2. Does the index match the asset location you have in mind?
Check how stocks and bonds are weighted in the ETF. Find out whether the weight matches your
requirements.
3. Once you have identified the ETFs that match your portfolio requirements, then the next thing
to look at is tracking errors.
Check the difference between the tracking instrument and the ETF to find out the risk of the ETF.
4. The liquidity determines your probability of investment. Look for ETF that provides adequate
liquidity.
Two factors that play a role in liquidity of ETF are- liquidity of fund itself and cash of shares that
are being tracked.

What are the risks involved in the ETF?


There are a few things that you must be aware of:
1. The primary risk is that of liquidity. Buying and selling prices of this financial instrument may
differ.
2. It requires you to interact with a broker and maintain a Demat account (account made to
transact).
3. If the market goes up, you gain profit. But if it goes down, you suffer loss.
4. If tracking error is very high, then funds will carry higher risk.
Which are the major banks in India and what
ETF they offer?

Schemes Asset Size (in Cr.) % Change Returns (in %) of 1 year

Reliance ETF NV20 18.79 -1.81 12.4

ICICI Prudential NV20 ETF 2.89 – 12.0

HDFC Sensex ETF 276.98 -0.58 9.5

Kotak Nifty ETF 552.97 -1.68 6.5

SBI ETF BSE 100 1.48 -0.78 3.9

Other FAQs about ETF or Exchange Traded


Fund

Are ETFs only for stocks?


 No, any asset class that has a published index and has adequate liquidity can be made
into an ETF.

Can non-U.S. citizens own ETFs?


 ETFs are available in most of the developed nations.
In the U.S. anyone who can open a brokerage account and buy stocks can own ETF.

How do ETFs derive their liquidity?


 ETFs derive their liquidity by:
 1. Trading of units in the secondary market.
 2. Redemption process with the fund.

What happens to dividends?


 Dividends received by the scheme will be reinvested in the system. Profits may also be
distributed to investors.

How much money is in ETFs?


 From the beginning of 1998 to the end of 2000, assets under management of ETFs grew
nearly tenfold. In 2001, the assets had reached $75.8 billion.

Who can buy ETFs?


 Any investor can buy it through provided the ETF is registered for sale.

How does one trade ETFs?


 They can be bought or sold just like stocks through the trading terminals anywhere
across the country.