ETF full form and meaning
Updated: Oct 8, 2023
The full form of ETF is Exchange traded fund, it is an investment company that helps investors to invest in a collection of securities such as equities or bonds, etc. ETFs are similar to Mutual funds. As rightly indicated by ETF full form, ETFs can be traded directly on the stock exchange or stock market during trading sessions similar to stocks. The ETFs currently listed on NSE track Indices such as Nifty Bank, Nifty 50, Nifty smallcap 250, etc.
In this blog, we will be discussing the working of ETFs, their advantages, disadvantages, returns, and some basic terms that would help you to select the right ETF.
Table of Contents
How do ETFs work?
ETF providing companies track indices such as Nifty 50, Nifty Small cap 250, etc. The ETF Sponsor/ AMC is the first participant who creates the fund. The ETF sponsor then distributes the shares/ units of these funds among authorized partners. The authorized partners sell these units in the Secondary Market where Retail investors can buy and sell a proportion of these ETFs. Unlike Mutual funds, the NAV of ETF is calculated in real-time.
ETFs are passive funds because the portfolio of an ETF is as same as the index it is tracking. The portfolio of an ETF changes dynamically as the list of companies in the respective index. Hence, they do not require active management of securities.
What are some Advantages and Disadvantages of ETFs?
Advatages | Disadvantages |
As ETFs are passively managed, they have a low expense ratio 0.05-0.3% | ETF are not designed to outperform the markets hence they offer low returns compared to mutual funds and direct stock trading |
Portfolio diversification takes place by default | Portfolio diversification is limited and resticted to large cap in many cases |
Dividends of a company are reinvested immediately | Lower dividend yeild |
In case of equity ETF, investors do not have to pay any tax on long term capital gains up to 1 lakh rupees. | Tracking error by ETF manager may lead to additional costs |
ETF vs Mutual Funds
Nature: While both mutual funds and ETFs invest in a group of assets such as stocks, gold, bonds etc, but the fact that ETF can be traded during market hours provides a lot of flexibility for the investors. Investors can only purchase Mutual fund units at the end of the trading day on announced NAV whereas ETFs can be purchased in real time, this eliminates the additional cost due to difference in time of investment and time of trade.
Cost: Etf is more cost-effective as compared to mutual funds as they are passively managed.
Portfolio disclosure: Mutual fund companies usually disclose their portfolio holding on a monthly basis whereas ETF portfolio disclosure is daily and in real-time.
Taxes: ETFs are structured to allow in-kind creations and redemptions. This structure leads to less capital gains events hence leading to lower taxes.
Liquidity: ETFs are highly liqid and can also be traded on an intraday basis due to their structure however trading mutual funds on a intraday basis might be expensive.
ETF full form and How to select the right ETF?
As discussed earlier the full form of ETF is exchange-traded fund. In order to choose the right ETF you must be aware of 4 things - Your risk appetite, earning expectations, expense ratio of the fund, and tax implications.
Step 1 : Select the right type of Exchange-traded fund to invest
Currently, four ETF schemes are available to be traded on the NSE these include - Equity, Gold, Debt and world Indices.
Equity Exchange-traded funds: in India allow you to invest in indices such as Nifty 50, Nifty 100, Nifty Bank, Nifty Infrastructure, etc. The average returns from Equity ETF range from 7-8%. High risk compared to other ETFs
Gold Exchange Traded funds are based on gold price. These funds invest in gold bullion. This enables complete transparency in Gold ETF prices due to their direct linkage with Gold prices. The average returns range from 5-7%. these are Medium risk instruments.
World indices Exchange-traded funds allow investors in India to invest money in foreign markets through respective Indices. For example, MOSt Shares NASDAQ 100 tracks the NASDAQ 100 index. Through this ETF investors can invest in the American markets. Expected returns can range from 7-8%. These are high-risk Instruments.
Debt Exchange- Traded Funds invest in fixed-income assets. A large proportion of these funds can be invested in Bonds and similar assets and some portion in other indices. These are low-risk instruments with an average returns of 5-7%
Step 2: Compare ETF expense ratio
The expense ratio is the amount charged by ETF providing company, this amount is utilized to fund management and operations of the ETF fund. Although ETFs have a low expense ratio compared to mutual funds, choosing a fund with a high expense ratio can heavily impact your returns in the long term. Two funds with the same underlying Index might give different returns due to differences in expense ratio.
Step 3: Due diligence of the Management Company
Along with the expense ratio charged by the ETF company, investors must also be aware of the performance and capabilities of the ETF provider. These metrics help you to access the risk management capability of the ETF provider during bad market conditions
List of ETFs in India
The Exchange-traded funds available for trading in NSE India can be bifurcated based on their types as follows:
Equity Exchange-traded fund
NIFTYEES
ICICINIFTY
KOTAKNIFTY
M50
QNIFTY
IVZINNIFTY
SETFNIF50
UTINIFTETF
BSLNIFTY
ICICINF100
KOTAKBKETF
SETFNIFBK
M100
SETFNN50
KOTAKPSUBK
ICICISENSX
UTISENSETF
NIFTYBEES
NETFNIF100
BANKBEES
CPSEETF
NETFDIVOPP
NETFCONSUM
INFRABEES
JUNIORBEES
PSUBNKBEES
ICICIB22
Gold Echange Traded Fund
Debt Exchange Traded Fund
World Indices Exchange Traded Fund
Conclusion
Exchange-traded funds are a great investment instrument for your portfolio that gives you flexibility similar to stock trading and portfolio diversification opportunities such as mutual funds. These are good low-risk and consistent returns offering instruments for an investor
s
コメント