Exchange Traded Funds - ETF

What are ETFs:

An Exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. Think of it as a Mutual Fund that you can buy and sell in real-time at a price that change throughout the trading day.

ETFs have become one of the most popular investment instrument for both institutional and individual investors.

ETFs offer diversification, trading and arbitrage options for investors at a low cost. An ETF is a basket of stocks that reflects the composition of an Index, like CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents.

Advantages of ETFs:

1. While redemption of Mutual fund units takes place at a fixed NAV price (usually end of day), ETFs offer the convenience of intra-day purchase and sale on the Exchange, to take advantage of the prevailing price, which is close to the actual NAV of the scheme at any point in time.

2. They provide investors a fund that closely tracks the performance of an index throughout the day with the ability to buy/sell at any time, whereby trading opportunities that arise during a day may be better utilized.

3. They are low cost.

4. Unlike listed closed-ended funds, which trade at substantial premia or more frequently at discounts to NAV, ETFs are structured in a manner which allows Authorized Participants and Large Institutions to create new units and redeem outstanding units directly with the fund, thereby ensuring that ETFs trade close to their actual NAVs.

5. ETFs are like any other index fund, wherein, subscription/redemption of units work on the concept of exchange with underlying securities instead of cash (for large deals).

6. Since an ETF is listed on an Exchange, costs of distribution are much lower and the reach is wider. These savings in cost are passed on to the investors in the form of lower costs. Further, the structure helps reduce collection, disbursement and other processing charges.

7. ETFs protect long-term investors from inflows and outflows of short-term investors. This is because the fund does not incur extra transaction cost for buying/selling the index shares due to frequent subscriptions and redemptions.

8. Tracking error, which is divergence between the NAV of the ETF and the underlying Index, is generally observed to be low as compared to a normal index fund due to lower expenses and the unique in-kind creation/redemption process.

9. ETFs are highly flexible and can be used as a tool for gaining instant exposure to the equity markets, equitising cash or for arbitraging between the cash and futures market.

10. The first ETF in India, “Nifty BeEs (Nifty Benchmark Exchange Traded Scheme) based on Nifty 50, was launched in January 2002 by Benchmark Mutual Fund. It may be bought and sold like any other stock on NSE. Its symbol on NSE is “NIFTYBEES”.

11. NSE has ETFs listed on different assets like broad market equity indices, sectoral indices, global indices, gold, fixed income and bonds.

List of ETFs traded on NSE: https://www.nseindia.com/market-data/exchange-traded-funds-etf