ETFs are traded on the stock much like stocks. However, they do have a manager. It is similar to when a person’s portfolio has a portfolio manager. There are managers who do similar things with ETFs. It is a passive investment. It is a combination of mutual funds and stocks. ETFs can be bought and sold on exchange platforms.
For instance, A manager for an ETF is responsible for selecting the specific assets that happen to follow in the ETF they want to build. They have to choose the asset allocation so that the waitings of each asset they place in the ETF, and they are also responsible for rebalancing their fund for the specified interval that they choose.
ETFs can be broken into several different classifications:
- Index Funds – It copies the Index(Sensex or Nifty) comprising a certain number of companies.
- Commodity Funds – These funds are investments in raw materials or primary agricultural products, along with precious metals i.e gold and silver, energy resources like oil and natural gas etc.
- Industry Funds – Also known as Sector Funds i.e a group of companies that offer similar products.
- Bond or Fixed Income Funds – These are mutual funds that give return at regular intervals, on the basis of where the money is invested.
- Specific Niche funds – Thematic ETFs that allow an investor to invest in a particular segment in the market.
- Dividend Funds – Dividend Funds are a way for investors to get paid during unstable market periods, during when capital gains are inconsistent.
Primary advantage of ETFs
The primary advantage of ETFs is diversification. If you purchase one ETF you are already significantly diversified. This way in a time when you rebalance, you don’t have much effort to take up. You just need to balance the ones you already have, generally consisting of between 4-16 ETFs. In the case of stocks, it would be a big multiple of that number.
- ETFs trade similarly to stocks. You can follow the price on a particular day.
- There is no brokerage fee for an ETF, in general.
- ETFs have a lower management fee compared to a mutual funds.
- There is a very low amount of maintenance required compared to any other financial asset.
- Being passively managed, the expense ratio is far lower compared to mutual funds or stocks.
- No exit loads and instant liquidity.
- They are rebalanced when the Index is rebalanced, so they always perform average or above average(market average).
- It has a lower minimum investment required.
ETFs and Index funds are not the same things. If one needs the 24/7 trade ability that ETF offers, then it can be a valid online investing option. There are few more things to keep in mind:-
- INAV represents the fair price of an ETF, so paying a premium or receiving substantially less than INAV is generally ill-advised.
- Tracking error is the difference between the returns of the funds and the beneficiary index it is trying to mimic.
- How liquid is the fund? – Liquidity can be an issue in the case of ETFs as they can only be bought and sold on exchange platforms. One can only sell ETFs if there is enough demand, and that may not always be the case.