Exchange
Traded Funds
(ETFs) GROUP NO :14
ASHIF MON PK(23351019)
JIFFRIN INSAF P(23351037)
SOWMIYA TG(23311065)
WHAT IS ETFs ?
• Exchange Traded Funds are just what their name implies: baskets of securities
(Indices) that are traded, like individual stocks, on an exchange. Unlike regular
open-end mutual funds, ETFs can be bought and sold throughout the trading
day like any stock
• ETFs have lower cost of transactions and annual changes compared to index
funds
• ETFs are considered a safer product for risk averse and first-time investors who
want market linked returns.
History
The Exchange traded funds (ETFs) began their journey in India way
back in 2002, when the first ETF by Nippon India Mutual fund
(erstwhile Benchmark Asset Management Company Ltd) was
launched in India on the Nifty 50 Index. The ETF was listed on NSE
on January 8, 2002 and day one witnessed trading of Rs. 1.30
crores on NSE.
ADVANTAGES OF ETFs
1. While redemptions of Index 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.ETFs, listed on exchanges, offer broader reach and lower distribution costs, passing
savings to investors with reduced fees and streamlined processing.
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.
COMPARISON OF
ETFs WITH
OTHER MUTUAL
FUNDS
ETFs Vs. Open Ended Funds Vs. Close Ended Funds
PARAMETER OPEN ENDED FUND CLOSED ENDED FUND EXCHANGE TRADED FUND
Fund Size Flexible Fixed Flexible
NAV Daily Daily Real Time
Liquidity Provider Fund itself Stock Market Stock Market / Fund itself
Significant Premium / Discount to
Sale Price At NAV plus load, if any Very close to actual NAV of Scheme
NAV
Availability Fund itself Through Exchange where listed Through Exchange where listed / Fund itself.
Portfolio Disclosure Monthly Monthly Daily/Real-time
Uses Equitising cash - Equitizing Cash, Hedging, Arbitrage
Intra-Day Trading Not possible Expensive Possible at low cost
Structure of
ETF
Applications of ETFs
Efficient Trading: ETFs provide investors a convenient way to gain market exposure viz. an index
that trades like a stock. In comparison to a stock, an investment in an ETF index product provides
a diversified exposure to the market. Depending on the index, investors may obtain exposure to
countries/ markets or sectors.
Equitizing Cash: Investors with idle cash in their portfolios may want to invest in a product tied
to a market benchmark like an index as a temporary investment before deciding which stocks to
buy or waiting for the right price.
Managing Cash Flows: Investment managers who see regular inflows and outflows may use
ETFs because of their liquidity and their ability to represent the market.
Diversifying Exposure: If an investor is not sure about which particular stock to
buy but likes the overall sector, investing in shares tied to an index or basket of
stocks provides diversified exposure and reduces stock specific risk
Filling Gaps: ETFs tied to a sector or industry may be used to gain exposure to new
and important sectors. Such strategies may also be used to reduce an overweight or
increase an underweight sector.
Shorting or Hedging: Investors who have a negative view on a market segment or
specific sector may want to establish a short position to capitalize on that view. ETFs
may be sold short against long stock holdings as a hedge against a decline in the
market or specific sector.
ETFs Launched on NSE
In recent times, Exchange-traded funds (ETFs) have gained a wider acceptance as financial
instruments whose unique advantages over mutual funds have caught the eye of many an
investor. These instruments are beneficial for Investors that find it difficult to master the tricks
of the trade of analyzing and picking stocks for their portfolio.
Various mutual funds provide ETF products that attempt to replicate the indices on NSE, so as
to provide returns that closely correspond to the total returns of the securities represented in
the index.
ETF's available on NSE are diverse lot. Equity, Debt, Gold and International Indices ETF's are
available.
ETF's Scheme launched on NSE
1. Equity
2. Gold
3. World Indices
4. Debt
CONCLUSI
ON
ETFs have revolutionized the investment landscape by providing a
convenient and cost-effective way to gain exposure to diverse asset
classes. As the financial markets continue to evolve, ETFs are likely
to remain a staple in investors' portfolios, offering opportunities for
growth, diversification, and wealth accumulation. However, investors
should always conduct thorough research and consider their
investment objectives before incorporating ETFs into their strategies.
