ETF: A SAFE BET

Go the ETF way if you don’t want a fund manager to decide where you invest

Exchange Traded Funds (ETFs), which give you indirect exposure to a certain asset class, have been in existence since 2000. However, they drew greater attention when the EPFO (Employees’ Provident Fund Organisation) decided to invest in the equity market via this investment vehicle. ETFs are hugely popular worldwide, with nearly 1,300 of them listed on the NYSE. Paltry by comparison, only 60 are listed on India’s NSE.

WHAT MAKES ETF SPECIAL?

The distinguishing characteristic of an ETF is that it offers the flexibility of a stock and the protection of a fund, at a very low expense ratio (average ratio less than 1 per cent)

The portfolio mimics the securities in the underlying index; securities may be equity, debt or commodities

Can be bought or sold just like a stock any time during the day

Given its passive nature, the costs are lower than in a regular mutual fund

Is an efficient way to diversify into a variety of stocks in a single sector or a variety of sectors

Portfolio holdings always transparent unlike regular mutual funds, where holdings are revealed only on a monthly basis

Churn in portfolio is limited to changes made in underlying index

An investor can buy/sell on the exchange without approaching a fund house

No entry or exit load

DRAWBACKS

Need a demat account Buying or selling involves brokerage Liquidity sometimes low Investment choice limited Since they mirror the underlying index, returns can be disappointing in a downturn compared to managed funds, which can outperform the market

WHY ARE ETFS NOT SO POPULAR?

Unlike mutual funds, where the research and bottom-up stock-picking abilities of managers generate sizeable alpha in the near- to medium-term, gains in ETF are restricted to appreciation in the underlying asset class

Over the past year, while ETFs have delivered 9 per cent returns, diversified equity has returned 18 per cent. But as time passes, the alpha generated is bound to taper

If an investment goal is, say, 20 years away, then an exposure to an index ETF like Nifty adds power to the portfolio.