Have you ever wondered that you can invest passively in the equity markets or for that matter in any investment instrument? Answer is Yes!
Now what is passive investment and what is that instrument available for passive investment? Let us understand that this from an equity markets point of view. Passive investment means investing in a defined basket of securities (stocks). We all know that Nifty 50 Index has 50 stocks and Sensex has 30 stocks and they together represent a basket of securities from various sectors creating one entire index. These indices have historically delivered ~12-14% p.a. over time. Please note that equity markets are subject to market risks! These returns are not linear and vary over time.
What are ETFs?
ETF is a passive way of investing in the markets
ETFs are baskets of stocks that track a corresponding benchmark index
They are generally readjusted automatically
Types of ETFs in India:
Equity ETFs: These can be pure index funds and can be further bifurcated into large cap ETFs, mid caps, multi caps and global ETFs
Gold ETFs
Bank ETFs: Kotak Banking ETF Fund
Debt ETFs: Bharat Bond ETF managing a AAA rated PSU portfolio
Sector Focused (Thematic): Nippon ETF consumption
Advantages of ETFs:
Low-cost investments: ETF being passive investments, the expense ratios are lower than mutual funds
Diversification: ETFs provide exposure to wide range of industries by buying bunch of stocks.
Transparent: ETF holdings are generally the index stocks and hence, there is transparency of the ETF investment holdings
Trade like stocks:
ETFs can be bought at anytime during the market trading hours with a buy /sell limit orders or a certain stop loss.
Mutual Funds can be bought only at a particular end of the day NAV and hence, it is not real time investment
Hence, ETFs provide liquidity to the portfolio
Ticket-size: ETFs can be traded for as low as Rs. 500, even though an individual stock might be of Rs. 1,000+
What to watch-out for?
Brokerage: Just like any stock, the ETFs are subject to brokerage, statutory levies like STT, stamp duty, etc.
Tracking Error:
Tracking error is an extent to which the NAV of an ETF is not consistent with the movements of the underlying benchmark on any given day / time period.
This error is generally due to cash kept for redemption proceeds, or due to rebalancing price differences of a particular stock
Hence, ETFs are subject to tracking errors and minor deviation from an index returns are possible.
Sectoral ETFs: While there is no harm in investing in sectoral / thematic ETFs, the investor should be vary of risks of investing in a particular sector especially with cyclical sectors.
Liquidity: Invest in ETF which have ample liquidity to buy and sell.
FinFact:
The five largest issuers of ETFs (measured by assets under management (AUM)) are:
BlackRock
The Vanguard Group
State Street Corp
Invesco Ltd.
Charles Schwab
The above 5 ETF’s manage more than USD 100 billion each. Blackrock has 2 trillion+ and The Vanguard Group has 1.5 trillion+ ETF AUM!
SPDR S&P 500 ETF Trust (SPY) from State Street has the largest share in an individual ETF scheme with $300 billion+ AUM
The worldwide ETF AUM at the end of year 2020 was ~USD 7.74 trillion!
ETFs in India:
Mutual Funds AUM grew from Rs. 17.5 lakh crores (~USD 0.23 trillion) in March 2017 to ~ Rs. 31.4 lakh crores (~USD 0.42 trillion) in March 2021 i.e., an overall increase of 79% and compounded year on year growth of ~15.5%.
Compared to that, ETF AUM (including Gold) was ~Rs. 50,000 crore in March 2017 (3% of overall MF AUM) and grew to ~Rs. 3.1 lakh crores in March 2021 (~10% of overall MF AUM), a 6x increase in 4 years and compounded year-on-year growth of ~57%!
ETFs provide a great way to diversify the portfolio. These investments track an index, or a specific sector (banking or pharma or IT), and they come with very low fees. ETF is nothing but investing in any other share of a listed company. So why wait, contact your financial advisor and start investing!
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