Exchange Traded Fund (ETF)
Exchange Traded Fund (ETF).
Exchange traded fund (ETF) are traded on the recognized stocks exchanges and usually it is the mutual funds schemes or Index or other asset class (like for example Gold). ETF can be bought and sold like any other stocks or securities. Mostly across the world most of the Indices are traded in ETF forms. The ETF can be hold as dematerialized forms in the Investor accounts. Though usually, most of the ETF are traded in secondary market, but practically, both primary & secondary market can co-exists in a particular country.
- One can buy and sell ETF like any other stocks or share. Once bought, stock is lying in the dmat account of Investor. Any investor can buy this. Minimum lot is one per unit. Any type of investors can participate in ETF
- The price is transparent. One can buy at market price or can put limit order. Buying and selling can be done on real time basis.
- If you buy Index ETF, you d not have to analyze the individual stock. You ETF performance will replicate the economy (asset) performance. The index is a combination of different stocks from different sector and industry. By buying this, it will diversify you risk profile in a great extent.
- Many other ETF like, for example, Gold ETF has the unique advantage compared to physical buying. It ensures purity, storage , liquidity, safety, transparency at the same time, client can take advantage of positive price movement.
Let’s see the advantage of ETF in different parameter. We have tried to put Gold ETF buying vis-à-vis investing through physical buying & buying through banks.
|Understanding Gold ETF in different parameter|
|Parameter||Bought through ETF||Through Jewelers||Through Banks|
|Form||Demutualization||Bar or coin||Bar or coin|
|Security||Secure||Investor concern||Investor concern|
|Impurity Risk||Very low||High||Very low|
|Pricing||Transparent||Not standard||Not standard|
|Selling back||Transparent and in Exchange||Conditional||Depends|
|Bid Ask Spread||Low||High||Not allowed|
Generally buying and selling ETF costs less because ETF trade is through brokerage firm. So it does not have various costs like mutual fund administrative costs etc. Sometime we have observed ETFs can trade at premiums or discounts during volatility market movement. Secondly, there may be tracking error in ETF.
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