Invest In Exchange Traded Fund For Better Price Efficiency

By Author: Vamsi Krishna
Total Articles: 27
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An exchange traded fund (ETF) is an investment instrument that integrates key characteristics of traditional mutual funds and individual stocks. Similar to index mutual funds, ETFs signify diversified portfolios of securities that track specific indexes. Like stocks, they can be bought and sold on an exchange throughout the trading day

The main objective of an ETF is to capture the key sectors of the economy by owning a diversified mix of major companies that characterize a bulk of the total market capitalization at a low cost. Investing in an ETF can improve risk management and portfolio development through segmentation and improved diversification at lower cost.

Why ETFs?

• Trade like stocks - ETFs experience price changes throughout the day as they are bought and sold. This permits investors to take advantage of the intra-day price movement.

• Diversification - ETFs offer diversification as it tracks the index that compromises companies from various sectors, reducing risk. For example, If you are keen on a particular sector, say, Automobiles, but are uncertain about which stock(s) to buy, investing ...
... in shares attached to an index or a basket of stocks will give you diversified coverage and reduce stock-specific risk.

• Transparency -Unlike several investment instruments that only release their holdings on a quarterly or monthly basis, most ETF index funds issue their exact holdings on a daily basis, so you understand what you own and respond accordingly to market activity.

• Low Transaction Cost - Economies of scale (benefit of larger volumes) means you pay lower transaction costs compared to an individual who enters the market directly.

• Passive Management - ETFs are passively managed funds, i.e. the manager makes only minor, periodic modifications to keep the fund in line with its index. It incurs few administrative costs than actively managed funds. Thus most ETFs have lower expense ratios than traditional MFs.

Why Edelweiss?

• Ability to track asset performance in My Portfolio – Provides a smart portfolio tracking tool that enables you to track your investment portfolio. It helps you examine your investments 24x7 and makes information simple to understand and faster to act upon.

• Online/Offline platform – Offers a state-of-the-art online trading platform for commodity trading and unmatched support & outstanding service through a direct helpdesk.

• Ease of fund transferability – Provides instant limits on fund transfer across multiple banks.

Product Features

• Enjoy limits- Enjoy trading limits against ETFs just like any other stock. Margin requirements are kept low to enable you to trade more.

• SIP in Gold ETFs – Edelweiss allows you to follow a systematic investment plan (SIP) while investing in Gold ETFs.

• Faster Analysis…Better Decisions - Edelweiss offers investors in-depth ETF schemes analysis available in the market. You can do a quick analysis using the information available or simply rely on our recommendations besides comparing schemes across categories and buying with a single click.

• Related products – Edelweiss’ comprehensive and structured advisory process takes a holistic look at your financial status, personal requirements and goals to recommend plans and solutions to help manage your finances. This also includes evaluation of your portfolio and advice on restructuring the portfolio in line with your long-term financial goals.

FAQs

What is exchange traded fund?

Exchange traded funds (ETFs) are index funds or trusts that are listed and traded intraday on an exchange. ETFs allow investors to buy or sell shares in the collective performance of an entire stock or bond portfolio as a single security. Exchange traded funds add the flexibility, ease and liquidity of stock trading to the benefits of traditional index fund investing.

How can I buy or sell exchange traded funds?

Investors can buy or sell exchange traded funds through a broker, the same as stocks.

How easily can I buy or sell exchange traded funds?

As easily as buying or selling shares of stock. Exchange traded funds are listed on an exchange and can be traded intraday, making it easy for investors to buy or sell ETFs.

What is the minimum size purchase of an exchange traded fund?

Investors can purchase as little as one share.

Why invest in an index?

Indexing, often called "passive management," involves investing in a group of securities that represent the composition of a broad stock market, stock industry sector, international stock, or U.S. bond index. Index funds offer "market level" performance; they aim to generally match the performance of a specific index. Index funds generally have lower management fees and operating expenses than actively managed funds.

What are the benefits of exchange traded funds trading as stocks?

The unique "exchange traded" structure offers several advantages to ETF investors:

• buy and sell at any time during the trading day
• instantly get exposure to a portfolio of stocks or bonds
• buy on margin
• sell short
• no sales loads, although brokerage commissions will apply
• lower fees
• tax efficiencies

How does the performance of an exchange traded fund compare with the performance of its underlying index?

Exchange traded funds are designed to provide investment results that generally correspond to their underlying benchmark index by holding a portfolio of securities designed to give similar price and yield performance. In the secondary market, one mechanism that helps to keep an ETF trading on the exchange at a price close to the value of its underlying portfolio is arbitrage. Because exchange traded funds are both created from the securities of an underlying portfolio and can be redeemed into the securities of an underlying portfolio on any day, arbitrage traders may move to profit from any price discrepancies between an exchange traded fund and the portfolio, which in turn helps to close the price gap between the two. (ETF creations and redemptions are restricted to large transactions, typically in multiples of 50,000 shares but ranging from 25,000 to 600,000 shares, usually transacted by large investors and institutions.) Of course, because of the forces of supply and demand and other market factors, there may be times when shares of an exchange traded fund trade at a premium or discount to its underlying portfolio value.

Can exchange traded funds be purchased on margin?

Exchange traded funds may be purchased on margin, subject to the same terms that apply to common stocks. Investors should contact their broker regarding initial and maintenance margin requirements.

Can exchange traded funds be sold short?

Yes. All exchange traded funds may be sold short, representing the sale of "borrowed" shares in anticipation of lower prices. Investors are required to make arrangements to borrow securities before selling short.

Is there a sales load on exchange traded funds?

While exchange traded funds are not subject to sales loads, usual brokerage commissions for securities purchases and sales will apply.

Do I get paid dividends on exchange traded funds?

ETF holders are eligible to receive their pro rata share of dividends, if any, accumulated on the stocks held in an ETF, and interest on the bonds held in an ETF, less fees and expenses. Of course, based on past performance, little, if any, dividend distributions can be expected on certain ETFs. There may also be the opportunity for dividend reinvestment.

Where do exchange traded funds initially come from?

Exchange traded funds are "created" by large investors and institutions in block-sized units of shares (or multiples thereof) known as "Creation Units" of a respective ETF. A creation requires a deposit with the trustee for a specified number of shares of a portfolio of securities closely approximating the composition of the specific index and a specific amount of cash in return for shares of a specific exchange traded fund. Similarly, block-sized units of exchange traded fund shares can be redeemed in return for a portfolio of securities approximating the index and a specified amount of cash.

Is the value of an exchange traded fund equivalent to the value of the underlying index?

Not necessarily. The share price of many exchange traded funds is initially set at a percentage of the index upon which they are based, but may differ over time due to costs and other factors.

Where can I get up-to-date price information on ETFs?

The pricing of exchange traded funds is continuous on the Stock Exchange during normal trading hours. Investors can obtain this information from their brokers, stock quotation systems, or on a delayed basis. The closing prices are also published in major newspapers on the following business day.

Where can I get a prospectus?

It is important that investors read a prospectus for all exchange traded funds in which they are interested. A prospectus, which contains more complete information, including charges, expenses and potential risks, can be obtained on a specific exchange traded fund. Read the prospectus carefully before investing.

What are the risks of investing in ETFs?

Equity-based exchange traded funds are subject to risks similar to those of stocks; fixed income-based ETFs are subject to risks similar to those of bonds. Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Foreign investments have unique and greater risks than domestic investments. Past performance is no guarantee of future results.

Fixed Income ETFs

What are fixed income ETFs?

Fixed income ETFs are bond index funds that are listed and traded intraday on an exchange. They let investors buy or sell shares in the collective performance of an entire bond portfolio as a single security. ETFs add the flexibility, ease and liquidity of stock trading to the benefits of traditional bond index fund investing.

Why buy fixed income investments?

Diversifying into fixed income investments may provide stability to an equity portfolio because the bond markets are often less volatile than the stock markets.

Do fixed income ETFs pay dividends?

Yes. Dividends, if any, will be distributed on a monthly basis, similar to bond mutual funds.

How will fixed income ETFs be taxed?

Dividends paid out of an ETF's net investment income and net short-term capital gains, if any, are taxable as ordinary income. Distributions of net long-term capital gains, if any, in excess of any net short-term capital losses, are taxable as long-term capital gains.

Will fixed income ETFs be as tax efficient as equity ETFs?

Because fixed income ETFs typically has higher yields than equity ETFs, they may not be as tax efficient. In addition, the deletion of maturing bonds from bond indexes and the addition of newly issued bonds may result in higher turnover rates than equity funds.

Author Bio

Ritish Kumar is a finance enthusiast and a keen observer of the Indian share market. In this series of articles, he talks about investing in stock market and staying profitable. mutual funds