Exchange Traded Funds (ETFs)

Well most of us know what a mutual fund is. To keep it simple, it is an investment house (company) that collects funds available with retail investors and invests them in stocks, bonds, commercial papers etc of various companies & the govts. alike, and in return, gives mutual fund units (or MF shares as they are called in the US) to the investors.

Exchange traded funds (ETFs) is a security like an index fund, a commodity, or a basket of assets with a difference that it trades on the exchange (like the NSE) just like common stock, thus it would have intra-day price fluctuations like stock as compared to Mutual Fund Units whose NAVs show price change only at the end of the day (everyday for open-ended schemes, weekly etc for closed ended schemes). Thus ETF could be classified as an open ended MF.

Thus ETFs’ price changes on the exchange just as it is bought and sold thru the exchange. Thus an ETF will not have its NAV calculated at the end of each trading day, but the final close price after closing bell on the exchange is the price of that ETF.

Advantages of an ETF:

Well put it this way. It is a combo offer. How? So as I said that it is a mutual fund (or pretty much like it), thus an investor would get the diversification of a Mutual fund, along with the option of trading it like a stock (like short-selling, margin, intra-day trading etc). Another advantage is that the expense / costs with ETFs are much lower than those of normal mutual funds, meaning you pay a much lesser commission to your broker for ETF than for any other MF.

Some key features of ETF:

1. Open ended MF – though not technically MFs, can be traded on an exchange like common stock.

2. Generally comprise of basket of securities.

3. These are passively managed MFs

4. Generally traded in large blocks (of 50000 units etc).

5. For convenience, the Net Asset Value (NAV) of the ETF is usually represented as a fraction of its underlying index.

Facts and figures:

1. ETFs are fastest growing MF structure in the world.

2. The first ETF in India was launched by benchmark MF and was called ‘Nifty BeAS’ – Nifty Benchmark Exchange traded scheme. In Dec 2001.

3. For instance, the Benchmark Nifty ETF has an NAV that is one-tenth of the prevailing Nifty value.

4. Some Indian ETFs are:

1. Nifty BeAS

2. Juniior BeAS

3. SUNDER – UTI AMC

4. SPiCE – PruICICI AMC etc.