What exactly are ETFs?
ETFs are essentially Index Funds that are listed and traded on exchanges like equities. This was not previously conceivable prior to the advent of ETFs. ETFs have globally opened up a whole new world of investing choices for both retail and institutional money managers. They let investors to acquire wide exposure to whole stock markets in many countries and specialised sectors with relative ease, in real time, and at a lower cost than many other types of investment.
An ETF is a stock basket that mirrors the makeup of an index, such as the S&P CNX Nifty or the BSE Sensex. The trading value of an ETF is determined by the net asset value of the underlying companies that it represents. Consider it a Mutual Fund that you may purchase and sell in real-time at varying prices throughout the day.
Benefits of EFTs
ETFs provide various benefits to investors, including: –
- It is as simple to buy and sell as any other stock on the exchange, with terminals located throughout the country.
- Can be purchased or sold at any time during market hours at a price close to the Scheme’s real NAV.
- There is no need to fill out a separate form. All it takes is a phone call to your broker or a click on the internet.
- The ability to place limit orders.
- The first investment is one unit.
- Take use of the flexibility of a stock and the diversity of an index fund.
- The expense-to-income ratio is lower.
- Allows for futures and cash market arbitrage.
How to Select an International Exchange Traded Fund (ETF)
There are several ways to invest in overseas markets:
- International ETFs exclusively invest in overseas markets and do not include the United States.
- Global ETFs, often known as world ETFs, give exposure to both overseas and domestic markets.
- Regional ETFs focus on a certain region of the world, such as Europe or the Pacific region.
- Developed market ETFs invest in overseas nations with established economies such as Japan, France, and the United Kingdom.
- Emerging markets ETFs pool assets in countries with “emerging” economies, such as India, Brazil, and China.
EFTs are suitable for—
ETFs may be used by a wide range of investors, including:
Large institutional players aiming to index core holdings or pursue more aggressive market timing and sector rotation strategies have historically been the dominant participants in this market. Smaller Institutions and Retail Investors, on the other hand, can invest in basically the same conditions as Large Investors since they can trade in small amounts.
1. It allows Retail or Wholesale Investors with a long-term view to diversify their portfolio with a single investment. It protects them from the Fund’s other investors’ short-term trading activity since ETFs have a unique in-kind creation / redemption process. ETFs with lower expenses outperform in terms of net returns over time.
2. It enables low-cost asset allocation, hedging, and equitisation of cash for FIIs, Institutions, and Mutual Funds.
3. It facilitates arbitrage between the Cash and Futures markets while imposing a minimal impact cost on arbitrageurs.
4. ETFs give access to liquidity for investors with a shorter time horizon due to their ability to trade during the day and at prices close to NAV.