This podcast explains the basics of Exchange Traded Funds (ETFs) and how they stand in comparison to mutual funds.
In recent times, Exchange-traded funds or ETFs have gained wider acceptance as financial instruments. ETFs have certain advantages over mutual funds that. They are beneficial for investors that find it difficult to analyze and pick stocks for their portfolios. Various mutual funds provide ETF products that attempt to replicate the indices on the NSE so as to provide returns that closely correspond to the total returns of the securities represented in the index.
Didn’t get that? Ok, try this. If an index fund and stock got married, their child would be an ETF. ETFs inherit traits from both index funds and stocks. Just like index funds, ETFs are low cost, diversified and passively managed. Just like stocks, ETFs are bought through a brokerage account and trade on an exchange during market hours. ETFs available on the NSE are a diverse lot, - equity, debt, gold and international indices ETFs. The CPSE ETF has public sector stocks as underlying assets. The present CPSE ETF has 10 such large-cap stocks, a basket that will be expanded. ETFs have lower cost structure compared to actively managed funds. However, one has to pay brokerage on trading.
In effect, EFs are a mashup of these traits and have become popular investment tools. How popular? Estimates are that there are about 3 trillion dollars in assets in ETFs around the world.
Okay, so how do ETFs work? Imagine that your ETFs are baskets. And each of these baskets contains actual securities. Say you have a bonds basket filled with govt bonds. A basket for gold. And a basket with shares in a company that manuactures….let‘s say...solar panels..
Now, say you want to buy gold for about 50k. How much gold are you gonna get for that amount? No enough to impress your mother in law. Or even your mother, really. So, instead of walking around with a less than impressive gold chain, ETFs allow you to invest in gold ETFs. You’re buying the shares of that big basket of gold. These shares trade just like stocks.
There lies the pull of the ETF. You don’t need to be wealthy to invest in a good ETF. And ETF’s are simple to buy, sell and own.
ETFs are different from Mutual Funds. Unlike MFs where you purchase a fund at it’s NAV or Net Asset Value at the end of the day, ETFs, as we’ve mentioned before trade like shares during the day.Which brings us to the all-important question. What returns can you expect on an ETF?ETF returns reflect the total returns of securities in the index. The performance of an ETF is similar to the index being tracked. If you have a gold ETF, you know what to expect at the end of a day.
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