What are ETFs in Stock Market?

An ETF, or exchange traded fund, is a collection of securities that trade on the stock market and is similar to a stock. Exchange traded funds pool the money of many investors and use it to buy a variety of tradable financial assets, including derivatives, debt securities like bonds, and shares. Most ETFs have Securities and Exchange Board of India (SEBI) registrations . For individuals with little experience in the stock market, it is a desirable alternative.

Exchange Traded Funds (ETFs): How Do They Operate?

As mentioned earlier, ETFs share traits with both shares and mutual funds, so if you’re wondering what an ETF fund is or how it operates, read on. Typically, they are exchanged in the stock market as shares made possible by creation blocks. All significant stock exchanges list ETF funds, which can be bought and sold according to need during the equity trading period.

The costs of the underlying assets included in the resource pool determine changes in an ETF’s share price. The share price of the ETF increases proportionately when the price of one or more assets increases, and vice versa. The performance and asset management of the relevant ETF business affect the dividend value received by ETF shareholders.

An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. Some examples of ETFs are SBI ETF Nifty 50, UTI Sensex Exchange Traded Fund, Fidelity Nasdaq Composite Index ETF, Motilal Oswal Nasdaq 100, motilal oswal nasdaq 100 etf.

Depending on company policies, they can be controlled actively or passively. A portfolio manager runs actively managed ETFs after carefully analysing the state of the stock market and taking calculated risks by investing in high potential companies. On the other hand, passively managed ETFs invest just in the companies that are mentioned on the ascending charts and track the patterns of particular market indices.

 

 

ETF categories

In India, the following ETF fund types are most prevalent:

Equity ETFs: These represent companies that invest in the shares and other types of equity of different
organisations.

Gold ETFs: Gold ETF is a commodity exchange-traded fund that primarily uses physical gold assets. By purchasing stock in this corporation, you can own gold on paper without having to worry about asset protection.

Debt ETFs: Companies that trade in fixed return instruments like government bonds and debentures are
frequently referred to as debt ETFs.

Currency ETFs: Funds invested in currency ETFs primarily profit from exchange rate fluctuations. Based on mathematical projections of that currency’s future performance, they buy the currencies of various nations. Currency ETFs monitor the political and economic climate of the individual nations in addition to stock market trends.

Advantages of ETFs

Simple to trade: Unlike other mutual funds, which trade at the end of the day, you can buy
and sell at any time of the day.

Transparency : The majority of ETFs must report their holdings everyday.

Benefits over Mutual Funds:  The lower costs of investing in ETFs over mutual funds ar one of the main advantages. Mutual funds are subject to a number of costs, including management fees, entry and exit loads, etc. This raises your overall expenditure ratio and the expense ratio of mutual funds as a whole. ETFs have a much lower expense ratio because they are traded similarly to shares on the stock market.

Tradeable security: Any changes in the value of an ETF may be seen right away, and trades can be made all day long. Thus, it follows that ETFs have far more liquidity than mutual funds. This gives you the ability to be flexible in your investment decisions and makes it simple for you to switch to a different security in the event that one particular asset isn’t turning a sufficient profit.

Trading transactions: Because they are traded like stocks, investors can place a range of order types (such as limit orders or stop-loss orders) that are not permitted with mutual funds because they are traded in the same way.

Disadvantages of ETFs

Trading fees: If you frequently invest small sums, there may be less expensive alternatives, such as dealing directly with a fund company to invest in a no-load fund. Illiquidity: Due to some weakly traded ETFs’ broad bid/ask spreads, you will be purchasing at the high spread price and selling at the low spread price.

Tracking Error: Despite the fact that ETFs often follow their underlying index pretty well, tracking errors can occur.

Settlement Dates: ETF sales are not officially settled for 2 days after a transaction, which implies that as the seller, your proceeds from an ETF sale aren’t practically available for reinvestment for that period.

Top Performing ETFs in India

Based on data available as on 01 July, 2022 here are some funds that have delivered consistently higher returns than peers as well as the respective benchmarks over the 3 year and 5 years periods. This is an exercise in identifying performing funds and should not be construed as advice.

Fund Name	1Y Return (p.a.)	3Y Return (p.a.)
CPSE Exchange Traded Fund	26.32%	4.07%
Invesco India Gold ETF	8.7%	13.12%
UTI Gold Exchange Traded Fund	8.21%	12.49%
Nippon ETF Consumption	6.84%	13.07%
ICICI Prudential NV20 ETF	2.67%	15.54%

Investment tactics

ETFs can be utilised to obtain exposure to practically any market in the globe or any industry sector once your investment objectives have been established. Using stock index and bond ETFs, you can invest your money conventionally, changing the allocation to reflect changes in your risk tolerance and objectives. Alternative assets, including gold, commodities, or developing stock markets, can be included. Similar to a hedge fund, you can quickly enter and exit markets in an effort to take advantage of short-term volatility. The point is that ETFs allow you to be whichever type of investor you choose to be.

Since the ETF market’s inception more than 29 years ago, innovation has been its defining feature. In the years to come, there will undoubtedly be new and interesting ETFs introduced. Despite the fact that innovation benefits investors overall, it’s crucial to understand that not all ETFs are created equally. Before buying any ETF, do your research and thoroughly weigh all the pros and disadvantages to be sure it’s the best option for your financial objectives.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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