What are ETFs?
ETFs are a basket of securities that are listed and traded on a recognised stock exchange. Simply put, they are mutual funds, whose units can be bought and sold on the stock exchange.
Given that an ETF is traded on the stock exchange, its price may not necessarily be the same as the NAV of the underlying portfolio. In other words, an ETF could have an NAV distinct from its market price. The reason being that the market price is usually driven by the demand and supply of units. Hence there is a distinct possibility of an ETFs units trading at a premium or discount to its NAV.
For Example Nifty BeES , whose underlying is NSE , may not have same price as its underlying , For example if Nifty is 4500 , it may be possible that The ETF’s value is 4600 or 4400 , depending on the sentiments and expectations.
GOLD ETF’s
We also have gold ETF’s , which tracks gold prices , Gold ETF’s are one of the best form of Gold Investments. To know more about it read : http://finance-and-investing.blogspot.com/2008/04/gold-as-investment.html
ETF’s in India
Nifty BeES : Tracking NSE
Quantum Index Fund : Tracking NSE
ICICI SPIcE Fund : Tracking BSE
Bank BeES : Tracking CNX Bank Index
Advantages of ETFs
1. ETFs tend to be more cost-effective vis-a-vis comparable mutual funds. The expense ratio of a passively managed ETF (tracking a benchmark index) would normally be in the range of 0.50%-1.00%; for an index fund, it can be as high as 1.50%. And for mutual funds the entry load is 2.25% .
2. ETF’s can be bought and sold anytime during the market hours , unlike the Mutual funds NAV at the end of the Day.
3. Given ETFs are traded on the stock exchange, and can be bought/sold on a real time basis; they tend to have low tracking error (deviation of ETF’s performance from that of the underlying index) as compared to index funds.
Disadvantages of ETF
1. Investors need to have a demat and a trading account, with a SEBI registered stockbroker, for investing in ETFs.
{ 18 comments… read them below or add one }
Good to get an introduction on ETFs still want to know more about it. How do we select an ETF how do we profit what should we study about it?
@sumi
There are lots of ETF’s available in the market . Some are more popular and hence more liquid than others , Check out the tracking error ? Tracking error is the mismatch between the actual underlying and the fund. Lower the tracking error better it is .
You can trade nifty options, if you want to trade the overall market and not individual stock.
Its recommended for people who can analyse and trade overall market like nifty , but do not have derivatives exposure .
In future , there is going to be very very heavy volumes and liquidity in Nifty ETF’s because of new pension scheme launced by GOVT .
as per the rules , they can only invest in index funds and ETF’s . so check out this space
can we get loan by pledging ETF when in need from a nationalized bank?
Jay
You can get loan on pledge of share and mutual funds . I have not heard about ETF ?
Manish
If the ETF’s actual unit value may not trult reflect the underlying asset (Nifty for eg. ) as the units are traded like stocks, how can they have low traking error compared to conventional index mutual funds?
For eg., an ETF based on the Nifty, may surge on demand, without actual increase in the Nifty, amounting to huge errors. The Nifty may be at 4400 but the ETF will be at 4700. So, how the ETF’s manage to have a low tracking error?
Rahul
No ETF has ever gone to those levels of difference . Maximum if nifty is at 4400 , Nifty ETF will trade around 4405 or 4395 . This is the range ETF trades in , Where have you see 4400-4700 level ? The day it happens , the tracking error will not be so low .
I think you are confusing ETF with Futures . IS it ?
Manish
1st thanks for ur reply mohit
no…i know ETFs dont go to those levels…but i am guessing that since ETFs have a finite no of units, like no. of outstanding shares of a firm, if new customers come in with their funds, the nav of these units should go up, isnt it?
also, can a buy ETFs, specifically index ETF, through an online brokerage firm? which brokerages provide this facility and what are the charges
Manish, i checked some Sensex ETfs (Kotak Sensex ETF, ICICI Pru), there can be significant tracking errors ! As recently as in oct ’09, these ETFs were in great demand as the indices were thought to rise, so by demand and supply equation, the nav of these funds climbed up.
Im really bugged !! i thot i wud be able to mirror the indices using index etfs…but that was not to be
Rahul
You can buy the ETF;s from ICICI direct or any other brokerage account , ETF’s are same as shares .
Let me know the source of where you got the information of high tracking error .
and who is “Mohit” ?
Manish
Mohit?? i dunno..:D
i forgot to save the link…but while i was researching i came thru this fact..
the period was oct 2009 and kotak etf was the case…but it was also present for all major index etf s
Rahul
In your last reply (see above) you thanked “Mohit” , so i thought who is He ?
Anywyas i will look at that .
Manish
just saw..
meeshtake !
Hi manish,
what is the tax structure for ETF’s? Any short term or long term taxes involved…how much. Also what is short term and long term period for ETF’s?
Thanks in advance
Jitesh
Jitesh
as of now its pure equity and hence tax same as shares are applied , 15% in short term (1 yrs) and no tax after 1 yr .
Manish
Manish,
in one of your article “Tax Treatment of Equity , Gold and Debt” and in the section “Profit from Jewellery” you mentioned that
Long term Capital gain : 30% tax on profit if sold after 3 yrs ( 1 yr in case of GOLD ETF)
please confirm
Jitesh
Jitesh
Nope , it should be 10% with indexation and 20% without indexation , I made mistake it seems .
Manish
I am wondering about the cash flow of the ETF. I would like to know if I buy the ETF then who keeps the money I paid? BSE/NSE?
In terms of normal stock if I buy a stock then money goes to seller and in term of Mutual fund the SIP premium goes to AMC. What happens in case of ETF, who keeps the money?
Just a random question
Balbir
ETF’s are nothing but a kind of share , which you trade in market , you its bought and sold in market , so just like a share , when you buy the ETF and pay money , the money goes to a random person like you who sold his ETF to you .
Manish
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