Bullion ETFs

ETFs or Exchange Traded Funds are investment vehicles which trade on the stock exchange like other instruments such as stocks, REITs, INVITS etc. A fund house comes out with an offering in form of a fund of fund that invests into a portfolio of securities and then an ETF linked to this fund of fund is issued for purposes of liquidity. These ETFs are backed by a portfolio of securities such as stocks, bonds and/or commodities that track a specific index or strategy.

ETFs and mutual funds are both investment vehicles that invest in a portfolio of securities after pooling assets from many investors. Some of the differences between the two are: a. ETFs trade on exchanges on a real-time basis while mutual funds are transacted once in a day. b. Mutual funds are bought and sold with the fund house being the counter-party while ETFs are bought and sold among other market participants on the exchange. c. ETFs typically have lowers costs when compared to mutual funds. d. Equity mutual funds are usually actively managed trying to outperform an index while ETFs try to match the performance of an index.

Price discovery in ETFs is driven by demand and supply on exchanges. Though a large deviation from the price and performance of fund of funds which have NAVs published on a daily basis will lead to arbitrage opportunities which in turn brings market efficiency. Marketability, transparency and liquidity of exchanges generally help ensure that ETF prices are aligned with the underlying value of the securities held within the fund of fund.

Passive investing tracks an index and aims to match the performance of that index while active investing uses an index as a benchmark to outperform through security selection, market aberrations and sector weightage. Costs associated with passive investing are lower when compared to active investing in terms of fund management fee. Active investing requires the research function to enable a superior investment strategy.

ETFs are a cost-effective route to diversified investing. It provides transparency and real-time markets to track one’s investments and transact as required. Also various asset classes and investment styles can be invested into through ETFs. There are also many smart beta options through factor ETFs to take advantage of various investment strategies. ETFs are taxable at individual investor level and capital gains taxes are liable only at sale. One can invest in an ETF through any brokerage account and it is as easy as transacting in a stock.

Like other instruments, ETFs are not immune from market fluctuations. When there is an economic downturn ETFs too will face suppressed prices like it is the case with other equity linked instruments or as the case may be with other asset classes. Sometimes ETFs become illiquid and thus have large spreads between bid/ask prices making it difficult to transact. Also ETFs whose fund of funds are not managed well can underperform the index they are supposed to match. Also there is a management fee involved which further takes away from the performance.