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Exchange Traded Funds (ETF)

Exchange Traded Funds (ETF) Advisor in Mumbai, India.

An ETF is a marketable security which tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an Exchange-Traded Fund trades like a common stock on a stock exchange. ETF price changes throughout the day as they are bought and sold. ETFs have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

As it trades like a stock, an ETF does not have its net asset value (NAV) calculated once at the end of every day like a mutual fund does.

An ETF is a fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares. The actual investment vehicle structure (such as a corporation or investment trust) varies by country, and within one country there can be multiple structures that co-exist. Shareholders do not directly own or have any direct claim to underlying investments in the fund; rather they indirectly own these assets.

ETF shareholders are entitled to a proportion of profits, such as earned interest or dividends paid, and they get a residual value in case the fund is liquidated. The ownership of the fund can easily be bought, sold or transferred in the same way as shares of stock since ETF shares are traded on public stock exchanges.

ETF Creation and Redemption

The supply of ETF shares is regulated through a mechanism called creation and redemption. The process of creation/redemption involves a few large specialized investors, known as the authorized participants (APs). APs are large financial institutions with a high degree of buying power, such as market makers that may be the banks or investment companies.

Only APs can create or redeem units of ETF. When creation takes place, an AP assembles required portfolio of underlying assets and turns that basket over to the fund in exchange for newly created ETF shares. Similarly, for redemptions, APs return ETF shares to the fund and receive basket consisting of the underlying portfolio. Each day, fund’s underlying holdings are disclosed to public.

ETFs and Traders

Since both the ETF and the basket of underlying assets are tradeable throughout day, traders take the advantage of momentary arbitrage opportunities, which keeps the ETF price close to its fair value. If a trader can buy ETF for effectively less than the underlying securities, they will buy the ETF shares and sell the underlying portfolio, locking in the differential. Our advisors keep a track of the prices and suggest best buys to be at benefit.

Some ETFs utilize gearing, or leverage, through use of derivative products to create inverse or leveraged ETFs. Inverse ETFs track opposite return of that of the underlying assets – for example, inverse gold ETF would gain 1% for every 1% drop in the price of the metal. Leveraged ETFs seek to gain multiple returns of that of the underlying.

Advantages of ETFs

By owning an ETF, investors get diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share (there are no minimum deposit requirements). Another advantage is that expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, one pays the same commission to the advisor that you’d pay on any regular order.

There exists the potential for favorable taxation on the cash flows generated by the ETF since capital gains from sales inside the fund are not passed through to shareholders as they commonly are with mutual funds.

Call us now on 977 391 0230 / 730 3333 758 for Investing in ETF. Top ETF advisor in Mumbai, India.