Showing posts with label Exchange-traded funds EFTs. Show all posts
Showing posts with label Exchange-traded funds EFTs. Show all posts
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.
Equitising 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.
Equitising 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
Exchange Traded FundsETFs Launched on NSE
- S&P CNX Nifty UTI Notional Depository Reciepts Scheme (SUNDER)
- Liquid Benchmark Exchange Traded Scheme (Liquid BeES)
- Junior Nifty BeES
- Nifty BeES
- Bank BeES
- PSUBNKBEES
- KOTAKGOLD
- GOLDSHARE
- GOLDBEES
- KOTAKPSUBK
- RELGOLD
- QUANTUMGOLD
- RELBANK
- QNIFTY
Advantages of ETFs
While many investors have similar outlooks, no two are exactly alike. Due to the unique structure of ETFs, all types of investors, whether retail or institutional, long-term or short-term, can use it to their advantage without being at a disadvantage to others. They allow long-term investors to diversify their portfolio at one shot at low cost and insulate them from short-term trading activity due to the unique “in-kind” creation / redemption process. They provide liquidity for investors with a shorter-term horizon as they can trade intra-day and can have quotes near NAV during the course of trading day. As initial investment is low, retail investors find it simple and convenient to buy / sell. They facilitate FIIs, Institutions and Mutual Funds to have easy asset allocation, hedging, equitising cash at a low cost. They enable arbitrageurs to carry out arbitrage between the Cash and the Futures markets at low impact cost.
ETFs provide exposure to an index or a basket of securities that trade on the exchange like a single stock. They offer a number of advantages over traditional open-ended index funds as follows :
ETFs provide exposure to an index or a basket of securities that trade on the exchange like a single stock. They offer a number of advantages over traditional open-ended index funds as follows :
- 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.
- 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.
- They are low cost.
- 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.
- 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).
- Since an ETF is listed on an Exchange, costs of distribution are much lower and the reach is wider. These savings in cost are passed on to the investors in the form of lower costs. Further, the structure helps reduce collection, disbursement and other processing charges.
- 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.
- 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.
- ETFs are highly flexible and can be used as a tool for gaining instant exposure to the equity markets, equitising cash or for arbitraging between the cash and futures market.
The first ETF in India, “Nifty BeEs (Nifty Benchmark Exchange Traded Scheme) based on S&P CNX Nifty, was launched in January 2002 by Benchmark Mutual Fund. It may be bought and sold like any other stock on NSE. Its symbol on NSE is “NIFTYBEES”.
Exchange Traded Funds : - Creations & Redemptions
ETFs are different from Mutual funds in the sense that ETF units are not sold to the public for cash. Instead, the Asset Management Company that sponsors the ETF (Fund) takes the shares of companies comprising the index from various categories of investors like authorized participants, large investors and institutions. In turn, it issues them a large block of ETF units. Since dividend may have accumulated for the stocks at any point in time, a cash component to that extent is also taken from such investors. In other words, a large block of ETF units called a "Creation Unit" is exchanged for a "Portfolio Deposit" of stocks and "Cash Component".
The number of outstanding ETF units is not limited, as with traditional mutual funds. It may increase if investors deposit shares to create ETF units; or it may reduce on a day if some ETF holders redeem their ETF units for the underlying shares. These transactions are conducted by sending creation / redemption instructions to the Fund. The Portfolio Deposit closely approximates the proportion of the stocks in the index together with a specified amount of Cash Component. This “in-kind” creation / redemption facility ensures that ETFs trade close to their fair value at any given time.
Some investors may prefer to hold the creation units in their portfolios. While others may break-up the creation units and sell on the exchanges, where individual investors may purchase them just like any other shares.
ETF units are continuously created and redeemed based on investor demand. Investors may use ETFs for investment, trading or arbitrage. The price of the ETF tracks the value of the underlying index. This provides an opportunity to investors to compare the value of underlying index against the price of the ETF units prevailing on the Exchange. If the value of the underlying index is higher than the price of the ETF, the investors may redeem the units to the Sponsor in exchange for the higher priced securities. Conversely, if the price of the underlying securities is lower than the ETF, the investors may create ETF units by depositing the lower-priced securities. This arbitrage mechanism eliminates the problem associated with closed-end mutual funds viz. the premium or discount to the NAV.
The number of outstanding ETF units is not limited, as with traditional mutual funds. It may increase if investors deposit shares to create ETF units; or it may reduce on a day if some ETF holders redeem their ETF units for the underlying shares. These transactions are conducted by sending creation / redemption instructions to the Fund. The Portfolio Deposit closely approximates the proportion of the stocks in the index together with a specified amount of Cash Component. This “in-kind” creation / redemption facility ensures that ETFs trade close to their fair value at any given time.
Some investors may prefer to hold the creation units in their portfolios. While others may break-up the creation units and sell on the exchanges, where individual investors may purchase them just like any other shares.
ETF units are continuously created and redeemed based on investor demand. Investors may use ETFs for investment, trading or arbitrage. The price of the ETF tracks the value of the underlying index. This provides an opportunity to investors to compare the value of underlying index against the price of the ETF units prevailing on the Exchange. If the value of the underlying index is higher than the price of the ETF, the investors may redeem the units to the Sponsor in exchange for the higher priced securities. Conversely, if the price of the underlying securities is lower than the ETF, the investors may create ETF units by depositing the lower-priced securities. This arbitrage mechanism eliminates the problem associated with closed-end mutual funds viz. the premium or discount to the NAV.
Existence Of Exchange Traded Funds ?
ETFs are just what their name implies: baskets of securities 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.
Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money.
They first came into existence in the USA in 1993. It took several years for them to attract public interest. But once they did, the volumes took off with a vengeance. Over the last few years more than $120 billion (as on June 2002) is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs. The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. The average daily trading volume in QQQ is around 89 million shares.
Their passive nature is a necessity: the funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitragers need to have full, timely knowledge of a fund's holdings.
Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money.
They first came into existence in the USA in 1993. It took several years for them to attract public interest. But once they did, the volumes took off with a vengeance. Over the last few years more than $120 billion (as on June 2002) is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs. The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. The average daily trading volume in QQQ is around 89 million shares.
Their passive nature is a necessity: the funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitragers need to have full, timely knowledge of a fund's holdings.
What are exchange-traded funds?
Exchange-traded funds (ETFs) are mutual fund schemes that are listed and traded on exchanges like stocks. ETFs trading value is based on the net asset value (NAV) of the assets it represents. Generally, ETFs invest in a basket of stocks and try to replicate a stock market index such as the S&P CNX Nifty or BSE Sensex, a market sector such as energy or technology, or a commodity such as gold or petroleum.
Recently, the Securities and Exchange Board of India (Sebi) amended its regulations and allowed mutual funds launch gold exchange-traded funds (GETFs) in India. Two mutual funds, UTI mutual fund and Benchmark Mutual Fund, are set to launch GETEs in a few days. These funds would be listed on the National Stock Exchange (NSE).
Recently, the Securities and Exchange Board of India (Sebi) amended its regulations and allowed mutual funds launch gold exchange-traded funds (GETFs) in India. Two mutual funds, UTI mutual fund and Benchmark Mutual Fund, are set to launch GETEs in a few days. These funds would be listed on the National Stock Exchange (NSE).
All about Exchange Traded Funds
In the domestic context, despite having been in existence for a while, Exchange Traded Funds have never quite captured the investor's imagination. This is in contrast to the scenario in markets like the U.S. where ETFs are quite popular. ETFs do have a bit of a history in India.
For example, we had a close-ended fund i.e. Morgan Stanley Growth Fund (launched in 1994) which was listed and traded on the stock exchanges. Year 2001 saw the launch of India's first open-ended, passively-managed ETF, Nifty Benchmark Exchange Traded Scheme (Nifty BeES).
Since then several ETFs of different varieties have been introduced. In this article, we discuss the investment proposition offered by ETFs and how they differ from conventional mutual funds.
What are ETFs? Simply put, an ETF is a basket of securities that is traded on the stock exchange, akin to a stock. So, unlike conventional mutual funds, ETFs are listed on a recognised stock exchange. Their units can be bought and sold directly on the exchange, through a stockbroker during the trading hours.
ETFs can be either close-ended or open-ended. Open-ended ETFs can issue fresh units to investors even post the new fund offer stage, although this tends to happen selectively on account of the substantial lot sizes involved. In case of ETFs, since the buying and selling is largely done over the stock exchange, there is minimal interaction between investors and the fund house.
Besides, ETFs can be either actively or passively managed. In an actively-managed ETF, the objective is to outperform the benchmark index. To that end, they have no obligation to invest in stocks from any benchmark index. On the contrary, a passively-managed ETF attempts to replicate the performance of a designated benchmark index.
Hence it invests in the same stocks, which comprise its benchmark index and in the same weightage. For example, Nifty BeES is a passively managed ETF with the S&P CNX Nifty being its designated benchmark index. In the Indian context, passively managed ETFs are more prominent.
For example, we had a close-ended fund i.e. Morgan Stanley Growth Fund (launched in 1994) which was listed and traded on the stock exchanges. Year 2001 saw the launch of India's first open-ended, passively-managed ETF, Nifty Benchmark Exchange Traded Scheme (Nifty BeES).
Since then several ETFs of different varieties have been introduced. In this article, we discuss the investment proposition offered by ETFs and how they differ from conventional mutual funds.
What are ETFs? Simply put, an ETF is a basket of securities that is traded on the stock exchange, akin to a stock. So, unlike conventional mutual funds, ETFs are listed on a recognised stock exchange. Their units can be bought and sold directly on the exchange, through a stockbroker during the trading hours.
ETFs can be either close-ended or open-ended. Open-ended ETFs can issue fresh units to investors even post the new fund offer stage, although this tends to happen selectively on account of the substantial lot sizes involved. In case of ETFs, since the buying and selling is largely done over the stock exchange, there is minimal interaction between investors and the fund house.
Besides, ETFs can be either actively or passively managed. In an actively-managed ETF, the objective is to outperform the benchmark index. To that end, they have no obligation to invest in stocks from any benchmark index. On the contrary, a passively-managed ETF attempts to replicate the performance of a designated benchmark index.
Hence it invests in the same stocks, which comprise its benchmark index and in the same weightage. For example, Nifty BeES is a passively managed ETF with the S&P CNX Nifty being its designated benchmark index. In the Indian context, passively managed ETFs are more prominent.
What are ETFs?
Simply put, an ETF is a basket of securities that is traded on the stock exchange, akin to a stock. So, unlike conventional mutual funds, ETFs are listed on a recognised stock exchange. Their units can be bought and sold directly on the exchange, through a stockbroker during the trading hours.
ETFs can be either close-ended or open-ended. Open-ended ETFs can issue fresh units to investors even post the new fund offer stage, although this tends to happen selectively on account of the substantial lot sizes involved. In case of ETFs, since the buying and selling is largely done over the stock exchange, there is minimal interaction between investors and the fund house.
Besides, ETFs can be either actively or passively managed. In an actively-managed ETF, the objective is to outperform the benchmark index. To that end, they have no obligation to invest in stocks from any benchmark index. On the contrary, a passively-managed ETF attempts to replicate the performance of a designated benchmark index.
Hence it invests in the same stocks, which comprise its benchmark index and in the same weightage. For example, Nifty BeES is a passively managed ETF with the S&P CNX Nifty being its designated benchmark index. In the Indian context, passively managed ETFs are more prominent.
ETFs can be either close-ended or open-ended. Open-ended ETFs can issue fresh units to investors even post the new fund offer stage, although this tends to happen selectively on account of the substantial lot sizes involved. In case of ETFs, since the buying and selling is largely done over the stock exchange, there is minimal interaction between investors and the fund house.
Besides, ETFs can be either actively or passively managed. In an actively-managed ETF, the objective is to outperform the benchmark index. To that end, they have no obligation to invest in stocks from any benchmark index. On the contrary, a passively-managed ETF attempts to replicate the performance of a designated benchmark index.
Hence it invests in the same stocks, which comprise its benchmark index and in the same weightage. For example, Nifty BeES is a passively managed ETF with the S&P CNX Nifty being its designated benchmark index. In the Indian context, passively managed ETFs are more prominent.
How ETFs are different from conventional mutual funds ?
Investors often confuse ETFs with conventional mutual funds. However, the fact is that they are different on several counts. Perhaps, the only similarity between ETFs and conventional mutual funds is that they both provide investors an opportunity to invest in an assortment of stocks/instruments through a single avenue.
1) First, an investor in a mutual fund needs to buy and sell units from the fund house. In case of an ETF, the transaction has to be routed through a broker as buying and selling is done on the stock exchange. In the rare case that an investor can buy or redeem units in an ETF through the fund house, it is normally done in a pre-defined lot size. Typically, the lot size tends to be substantial making it feasible only for institutional investors and high networth individuals.
2) Since ETFs are traded on the stock exchange, they can be bought and sold at any time during market hours like a stock. This is known as 'real time pricing' as ETF investors can transact at the price prevailing at that point in time. This is in contrast to mutual funds, wherein units can be bought and redeemed only at the relevant NAV; the NAV is declared only once at the end of the day. As a result, ETF investors have the opportunity to make the most of intra-day volatility. Of course, this may hold little significance for long-term investors.
3) ETFs are associated with low expenses vis-�-vis mutual funds. For example, a passively managed ETF which tracks a benchmark index (say S&P CNX Nifty) would have an annual recurring expense in the range of 0.44%-0.50%, while it would be around 1.00%-1.25% in case of an index fund tracking the same benchmark index.
Unlike mutual funds wherein entry/exit loads can vary between 2.00%-2.25%, ETF investors do not have to bear any loads. Instead they have to pay a brokerage while transacting. While brokerage rates vary across brokers, a brokerage of around 0.50% on each transaction in the Indian context can be regarded as being on the higher side. However, ETF investors must have a demat account, this in turn entails paying an annual maintenance charge (which can be about Rs 300). Since ETF investors often invest in stocks as well, the maintenance charge of the demat account can be apportioned on both the stock and ETF investments.
4) ETFs safeguard the interests of long-term investors. The reason being that since all the buying and selling of units is done on the exchange, the fund house doesn't enter the picture. Investors directly interact with other investors over the exchange. This in turn ensures that the fund manager's hand is never forced due to the buying/selling activity.
In case of mutual funds, the possibility of a substantial redemption adversely affecting the fund cannot be ruled out. For example, the fund manager might be forced to sell his best investments prematurely to meet the redemption pressure. This in turn could have a negative impact on the long-term investors' interests.
5) While mutual funds are always available at end-of-day NAV, ETFs do not necessarily trade at the NAV of their underlying portfolio. Rather, the market price of an ETF is determined by the demand and supply of its units (which in a close-ended ETF is fixed), which in turn is driven by the value of its underlying portfolio. Therefore, the possibility of an ETF trading below (at a discount) or above (at a premium) its NAV does exist.
Clearly, despite their seemingly similar structures, ETFs and mutual funds are distinct on several fronts. As always, investors should take into account their risk appetite and investment objectives, among a host of other factors; and consult their investment advisors/financial planners to determine the suitability of ETFs in their portfolios.
1) First, an investor in a mutual fund needs to buy and sell units from the fund house. In case of an ETF, the transaction has to be routed through a broker as buying and selling is done on the stock exchange. In the rare case that an investor can buy or redeem units in an ETF through the fund house, it is normally done in a pre-defined lot size. Typically, the lot size tends to be substantial making it feasible only for institutional investors and high networth individuals.
2) Since ETFs are traded on the stock exchange, they can be bought and sold at any time during market hours like a stock. This is known as 'real time pricing' as ETF investors can transact at the price prevailing at that point in time. This is in contrast to mutual funds, wherein units can be bought and redeemed only at the relevant NAV; the NAV is declared only once at the end of the day. As a result, ETF investors have the opportunity to make the most of intra-day volatility. Of course, this may hold little significance for long-term investors.
3) ETFs are associated with low expenses vis-�-vis mutual funds. For example, a passively managed ETF which tracks a benchmark index (say S&P CNX Nifty) would have an annual recurring expense in the range of 0.44%-0.50%, while it would be around 1.00%-1.25% in case of an index fund tracking the same benchmark index.
Unlike mutual funds wherein entry/exit loads can vary between 2.00%-2.25%, ETF investors do not have to bear any loads. Instead they have to pay a brokerage while transacting. While brokerage rates vary across brokers, a brokerage of around 0.50% on each transaction in the Indian context can be regarded as being on the higher side. However, ETF investors must have a demat account, this in turn entails paying an annual maintenance charge (which can be about Rs 300). Since ETF investors often invest in stocks as well, the maintenance charge of the demat account can be apportioned on both the stock and ETF investments.
4) ETFs safeguard the interests of long-term investors. The reason being that since all the buying and selling of units is done on the exchange, the fund house doesn't enter the picture. Investors directly interact with other investors over the exchange. This in turn ensures that the fund manager's hand is never forced due to the buying/selling activity.
In case of mutual funds, the possibility of a substantial redemption adversely affecting the fund cannot be ruled out. For example, the fund manager might be forced to sell his best investments prematurely to meet the redemption pressure. This in turn could have a negative impact on the long-term investors' interests.
5) While mutual funds are always available at end-of-day NAV, ETFs do not necessarily trade at the NAV of their underlying portfolio. Rather, the market price of an ETF is determined by the demand and supply of its units (which in a close-ended ETF is fixed), which in turn is driven by the value of its underlying portfolio. Therefore, the possibility of an ETF trading below (at a discount) or above (at a premium) its NAV does exist.
Clearly, despite their seemingly similar structures, ETFs and mutual funds are distinct on several fronts. As always, investors should take into account their risk appetite and investment objectives, among a host of other factors; and consult their investment advisors/financial planners to determine the suitability of ETFs in their portfolios.
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