Updated: Feb 21, 2022
Is it possible to get rich quickly from Bitcoin, Gamestop, Amazon, or Tesla?
Definitely yes – only if you time it right!
But the probability is less, and the odds are against you. Hence an intelligent investor invests a good portion of their capital in mutual funds and ETFs.
ETFs, give an edge as compared to mutual funds and individual stock investment.
What are Exchange Traded Funds (ETF)?
Electronic Traded Funds (ETFs) are a combination of equity shares and mutual funds. It is a type of pooled funds that will be invested in various securities like equities, bonds, commodities.
ETFs are a collection of stocks that often tracks an underlying index. They are listed on the stock exchanges, which can be bought or sold when the market is open.
There are many types of ETFs – Equity, Gold, Debt, Currency, etc. UTSL, Spy Stock, Invesco QQQ, Bharat Bond, Nippon India Gold Bees, and VIOV are examples of popular ETFs.
How do Exchange Traded Funds (ETFs) Work?
ETFs got the name because they can be traded on an exchange just like stocks. The price of the ETFs will change continuously when the market is open.
There are two types of ETFs – 1) Active fund and 2) Passive fund
In Active ETFs, a portfolio manager will decide to buy and sell the stocks within the fund.
On the other hand, Passive ETFs follow specific indices, and it doesn't require the intervention of a portfolio manager.
Image – Active ETFs vs Passive ETFs
As per Investopedia, ETFs' supply is regulated through 'Creation' and 'Redemption' through Authorized Participants (APs).
ETFs vs. Mutual Funds
ETFs offers many benefits over mutual funds:
Mutual Funds have many fees like entry fee, exit fee, management fee, etc. But ETFs don't have these expenses, and hence they offer a low expense ratio for your investment
Unlike mutual funds, these ETFs can be closed any time during market hours, and they don't carry any restrictions
Any change in the ETF can be benefitted (by buying or selling) in the live market. Whereas, with mutual funds, one has to wait as the NAV will be updated only after the market close
ETFs carry high liquidity compared to mutual funds. Hence, it is easy to shift between securities
Compared to mutual funds, ETFs carry less risk as they are passively managed.
Some Examples of ETFs
Below are some of the popular ETFs in the current market. Some ETFs have a broad portfolio, a few ETFs follow 1-2 commodities, and some ETFs target specific industry sectors.
SPY Stock – It is the oldest and most popular ETF in the world. It tracks the S&P index.
Gold ETF – There are many ETFs all over the world which track the gold commodity. Nippon India ETF Gold Bees, SBI Gold ETF, Birla sun life Gold ETF are some of the famous Gold ETFs in India.
Invesco QQQ – It is another popular ETF in the U.S. It indexes on Nasdaq 100 and tracks technology stocks most of the time.
UTSL – It is one of the popular ETFs in the U.S. It tracks U.S. utility companies drawn from the S&P 500.
Bharat Bond – It is one of the famous ETFs in India. Under this ETF, most of the money is invested in public sector bonds and comes with a defined maturity date.
Bank Bees – Nippon India ETF Bank Bees is the popular Bank bees fund that invests in banks and financial services.
Image - Quarterly ETF price from 2009 to 2019
Advantages of ETFs
ETFs, offer many advantages as compared to equity trading or mutual funds. Some of the benefits are below:
It offers less expense ratio as compared to other trading instruments. It means an investor transact (buy and sell) ETFs at a lower cost
There is no need to track multiple charts as most of the ETFs are based on an index. A glance at the respective index is enough to know the performance of ETFs
It provides good risk management through diversification
It offers an investment opportunity in specific sectors
It can be bought and sold during the live market. Hence, it is easy to liquidate
Disadvantages of ETFs
Even though ETFs offers many advantages, it comes with certain limitations. Some of the disadvantages are below:
An investor should have a Demat account to buy ETFs
ETF performance is directly related to market fluctuations. Unlike government bonds, stable returns cannot be expected with ETFs
The fee will be on the higher side in the case of actively managed ETFs
Sometimes, liquidity crunch can occur in some ETFs, which can hinder the buy/sell transactions
Which is the best ETF in India?
There are many ETFs across various sectors in India, and their returns continuously vary with market fluctuations.
Above is the list of top-10 ETFs in terms of returns as of 2-Feb-2021 since their inception. An investor can invest in a few good ETFs to reduce the risk and to get maximum benefits.
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