All about exchange traded funds?

ETF and exchange traded funds are very popular investment products globally. Exchange traded funds were first developed in the US in the early 90s and have been gaining immense popularity since then.

Mutual funds India offers two type of mutual fund investment to invest in – These are active mutual funds and passive mutual fund schemes. Exchange traded fund falls into the category of passive funds.

What is ETF?

ETFs invest in a basket of securities which replicate a particular index. For example, a NIFTY50 ETF will invest in all the 50 stocks which constitute the NIFTY 50 Index. Each stock in the NIFTY 50 Index will have the same weight as that of the index constitute. For example, if any stock has a 3% weight in the NIFTY 50 index, the same stock will also have 3% weight in the NIFTY 50 index ETF.

ETF mutual fund are always listed on the stock exchanges and can be bought and sold during the stock market trading hours just like any other shares listed on the exchanges.

However, the price of ETFs fluctuate during the market hours based on the demand and supply of the ETF on the exchanges. This is unlike active mutual fund schemes where the transactions take place based on the daily NAV. As you may know mutual fund NAV is declared daily and published on the website of AMFI India. ETF investors should refer to the ETF scheme NAV published daily and compare the same with the rate at which the ETFs trade on the stock exchanges.

Different types of ETFs

There are different types of exchange traded funds. Mostly people think ETF scheme means Sensex, Nifty and Gold exchange traded funds. However, investors should note that there are many types of ETFs which one can invest in India –

• Stock Index ETFs: These are the most common type of ETFs. These ETFs track indexes like Nifty, Sensex, Nifty 50 equal weight, Nifty 100, Nifty Next 50, Nifty low volatility, Nifty Midcap 150, BSE 500 etc.
• Sector ETFs: These ETFs track sector indexes like small cap ETF, consumption ETF, Bank ETF, Private Bank ETF, PSU Bank ETF, Midcap ETF and IT ETF, etc.
• Liquid ETFs: These ETFs invest in money market securities just like liquid funds and track relevant indexes S&P BSE liquid rate, Nifty 1 day rate etc.
• International ETFs: These exchange traded funds track international indexes like Hang Seng, S&P 500, Nasdaq 100, Nasdaq Q50, Hans Seng tech ETF, etc.
• Commodity ETFs: The commodity ETFs in India are Gold ETFs and Silver ETFs. These ETFs are backed by physical Gold or Silver.
• Bond ETFs: Bond ETFs primarily invest in Government Securities (G-Secs), State Development Loans (SDLs) and PSU bonds etc. and track relevant indexes e.g. Bharat Bond Index, Nifty G-Sec Indexes etc.

Benefits of ETFs

• The total Expense ratios of ETF mutual fund schemes are much less than the cost of actively managed mutual funds. This means higher returns to the ETF investors.
• There is no unsystematic risk in ETF mutual fund. ETF has only market risks compared to actively managed mutual funds as the fund managers have to be overweight / underweight on certain stocks / sectors relative to the benchmark index in order to generate higher returns to the mutual fund