A peek into ETF. Exchange Traded Funds

An ETF or exchange traded fund is a basket of securities which tries to imitate/ track the index. Though an ETF and index fund is different lot of people get confused between the two. An index fund is a mutual fund which tries to imitate the index and its value is the closing day NAV. ETFs are traded on the stock exchange like other scrip’s and the price of it usually fluctuates every second. ETFs also have lower expense ratio than mutual funds but it attracts broking fees as it has to be bought from the stock market. It also has the same tax structure of an Equity mutual fund wherein the STCG is 10%.Due to it flexibility to be traded on the exchange with less charge and tax it can be a product in the portfolio to time the market. Example, If we had invested during the last market correction when sensex was down more than 18 % to 12000 levels from its peak, our money now at sensex of 14600 would have grown by an absolute return of 21% (pre tax and 19% post tax) in just 5 months. I have seen lot of my new clients try to time the market by investing in mutual funds and getting out if it. It doesn’t make sense as there are charges called load every time you do this. Mutual funds also lose in tax angle as in it there is constant selling of shares/stock by the fund manager usually to adjust for the continuous redemptions by clients which attracts undue capital gains affecting the fund NAV.

Worldwide there are ETFs which tries to imitate various international market and various industries but in India we only have which imitates the local market. The three biggest international exchange-traded funds as of September 2006 were the $57 billion S&P 500 SPDR, also called SPIDER, managed by State Street; the $31 billion iShares MSCI EAFE, managed by Barclays; and the $18 billion Nasdaq-100 Trust, managed by Bank of New York Co., according to data compiled by State Street.
India got the first ETF in Dec of 2001 with the launch of ETF 'Nifty BeES' (Nifty Benchmark Exchange-traded Scheme) by Benchmark Mutual Fund, based on the S&P CNX Nifty Index. It’s not too far when India will have various local, industry specific or international ETF.

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Comments

  1. R John ChristyJuly 02, 2007

    Mr. Suresh , It is indeed a good work. Excellent. Keep it up.

    ReplyDelete
  2. UnknownJuly 02, 2007

    Thanks RJC
    Require your valuable feedback in future too

    ReplyDelete

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