Exchange Traded Funds (ETF): categories, how to choose,

 Introduction

ETFs have gained popularity in recent years because they are efficient and cheap, more so than mutual funds shares Indeed, because ETF can be bought and sold like stocks and owns the qualities of mutual funds, they are truly the best investment tool to diversify an investment portfolio. In this article we will understand what ETFs are, the types of ETFs, how to select a specific ETF, what are the advantages of holding ETFs, a comparison between ETFs, stock and mutual funds. We will also discuss some of the major ETF’s trading in India for readers who want a real-world approach.

What do ETFs stand for?

ETFs are mutual funds that invest in an index, commodity, sector, or other types of assets are bought and sold on a stock exchange in a similar manner to that of shares. While gaining importance over other types of mutual funds due to its monopoly in trading services, it is quite different from mutual funds because the price of a particular ETF can only be preferably bought at the end of the day and not during the trading period as is offered to mutual funds.

These funds are known to track the performance of a specified index or a particular class of assets, therefore operate as passive investment funds. They are supervised by fund managers, and their cost is relatively low compared to the actively managed funds.

Categories of ETFs

ETFs are categorized on the basis of the kind of asset that underlies or the investment style used. Some popular categories include:

Equity ETFs

• Follow stock futures especially the Nifty futures or Sensex futures.
• Most suitable for those investors with interests in equity markets accompanied by diversification.

Bond/Fixed Income ETFs

• You may borrow from government or corporate bonds.
• Stable to support and are generally appropriate for those who are seeking minimal risks.

Sectoral/Thematic ETFs

• Concentration on certain industries that can be interesting for the foreign investor, such as information technology, drugs or banking.
• Ideal for investment people with an optimistic bent towards a specific business segment.

Commodity ETFs

• Invest in precious metals, such as gold or silver or invest in materials like oil.
• Albeit, Gold ETFs have gained much popularity in India.

International ETFs

• Monitor values or prices of global markets including the Dow Jones Industrial Average.
• Provide geographical diversification to the Indian investors.

Currency ETFs

• Follow dollar or any other international currency to predict the currency markets.
• It is useful for global investors risking their capital and expect to receive returns in a foreign currency.

Smart Beta ETFs

• Indexes fixed by considering the value, the growth, or the volatility of the corresponding firms.
• Propose a model between the two extreme types of investments: the passive and the active ones.

How to Choose the Right ETF

Selection of an ETF is dictated by your needs, your ability to lose and/or gain, and your expectations of market trends. Here are the steps to guide your selection:

Analyzing Investment Options – Discovering Your Investment Goals

• Understand what you want — growth, income or stability.
• Basically, the clients want to choose their time horizon, and their respective financial objectives.

Know Your Underlying Index

• The index that an ETF tracks to determine what shares the ETF holds.
• Review the performance and risk characteristics of the index throughout history.

Analyze Costs

• A large number of funds result in comparison of expense ratios of similar exchange traded funds.
• Include brokerage fees and tracking errors.

Liquidity

• The ETFs that have greater trading volume should be easily to buy and sell from so that the investor can easily exit.

Fund House Reputation

• Relatively preferred ETFs from stable and reputable fund management companies.

Check Tracking Error

• Lower tracking error means that it is closer to the index it is trying to replicate.

Tax Implications

• Investors should assess the tax implications pertaining to capital gains and dividends linked with the ETF.

Benefits of Investing in ETFs

Diversification

• We are exposed to diversity in various forms of assets in simple form of investment.

Cost-Effectiveness

• Saving than mutual funds because of passive management Lower expense ratios due to passive management.

Liquidity

• ETFs also have the advantage of being traded during the day hence more flexibility.

Transparency

• These ETFs like any other investment vehicle reveal their holdings in the market on a daily basis hence are fully transparent.

Tax Efficiency

• Held in India, ETFs have been proven to attract fewer taxes compared with actively managed mutual funds.

Accessibility

• Simple, ideal for novices and professional investors alike.

ETFs vs. Stocks

ETFs vs. Mutual Fund

Some of the Exchange Traded Funds that are most sought after in the Indian stock exchange market are to Have Been Called by various companies.

Equity ETFs

• Nippon India ETF Nifty 50
• SBI ETF Sensex

Gold ETFs

• HDFC Gold ETF
• Kotak Gold ETF

Sectoral ETFs

• ICICI Prudential IT ETF
• Mirae Asset Healthcare ETF

International ETFs

• Motilal Oswal Nasdaq 100 ETF
• Edelweiss MSCI China ETF

Bond ETFs

• Bharat Bond Exchange Traded Fund (with maturity Corporate Bond maturity of Fiscal 2030 and Fiscal 2032)

Conclusion

ETNs are good investment product that meets most investors’ needs since they come in various structures to meet the needs of the investors. It merges the basic flexibility of the stock index investments with diversification that is inherent to mutual funds, which renders INDEX FUNDS as equally good for both an inexperienced and experienced investor. When you understand your financial objectives, your capacity to lose, and market conditions you can choose the right ETFs to form a solid investment portfolio.

Frequently Asked Questions

1. What is an ETF and how does it function?

Exchange Traded Funds or ETFs are investments traded in the similar way as common stocks on the level of a stock exchange. These are bought and sold in exactly the same manner as normal stock, through stock exchanges.

How it works:

• The investing public contributes money to be invested in the fund to purchase the securities which constitute the ETF (for instance stock, bonds, or metals).
• An ETF market price changes during the trading day in reflection to the value of the tracked asset portfolio.
• Since the ETF units are traded similarly to other shares on the stock market, investors can easily get in or out of it thus have liquidity.

2. Are ETFs for investors?

Yes, ETFs could be beneficial to many investors depending with his or her investment objective.

Advantages:

• Diversification: More than one security is own through a single ETF.
• Transparency: Disclosure of these holdings on a daily basis makes it clear.

Suitability:

• For novice investors who want to invest in simple and diversified instruments.

3. What is the short form of ETF?

ETF means Exchange Traded Fund.

4. Is it a stock exchange platform to list ETFs?

Yes, ETFs are also quoted and traded at the stock exchanges, much in the same manner as is done at Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India. One can buy units of an ETF that had been sold on these very exchange venues just like a stock during hours.

5. What are Types of ETFs?

ETFs can broadly be categorized based on the underlying asset or strategy. These are broadly categorized into the following types:

• Commodity ETFs: They are following commodities such as gold or silver.
• Sectoral/Thematic ETFs: Sector-specific, which may be of IT, Banking, Health care, and so on.
• International ETFs: Tracking international market indices or international stocks.
• Smart Beta ETFs: Track modified indices, either of value or growth factor bases.
• Currency ETFs: Track foreign currencies such as USD or EUR.