Exchange Traded Funds are becoming popular in
Exchange Traded Funds
Exchange Traded Funds (ETFs) represent a basket of
securities that is traded on an exchange, similar to a stock. Hence,
unlike conventional mutual funds, ETFs are listed on a recognised stock
exchange and their units are directly traded on stock exchange during
the trading hours. In ETFs, since the trading is largely done over stock
exchange, there is minimal interaction between investors and the fund
house. ETFs can be categorised into close-ended ETFs or open-ended ETFs.
ETFs are either actively or passively managed. Actively managed ETFs try
to outperform the benchmark index, whereas passively-managed ETFs
attempt to replicate the performance of a designated benchmark index.
Difference Between ETF and Conventional Mutual Funds
- Mutual funds are traded through fund house where as in an ETF,
transactions are done through a broker as buying and selling is done
on the stock exchange.
- In conventional mutual funds units can be bought and redeemed
only at the relevant NAV, which is declared only once at the end of
the day. ETFs can be bought and sold at any time during market hours
like a stock. As a result, ETF investors have the benefit of real
time pricing and they can take advantage of intra-day volatility.
- Annual expenses charged to investors in an ETF are considerably
less than the vast majority of mutual funds. Most of the mutual
funds have an entry or exit load varying between 2.00% and 2.25%.
ETFs do not have any such loads. Instead ETF investors have to pay a
brokerage to the broker while transacting. which in most cases is
not more than 0.5%.
- ETFs safeguard the interests of long-term investors. This is
because ETFs are traded on exchange and fund managers do have to
keep cash in hand in order to meet redemption pressures