What is an Exchange-Traded Fund (ETF)?
ETFs can be purchased and sold throughout the day over stock exchanges.
An exchange-traded fund (ETF) is a type of investment security traded on stock exchanges.
An exchange-traded fund (ETF) is a type of investment security traded on stock exchanges. These operate much like mutual funds. However, unlike mutual funds, ETFs can be purchased or sold on a stock exchange as a regular stock does. ETFs usually track a particular index, sector, commodity, or other assets. ETFs are also used to track specific investment strategies.
For example, the SPDR S&P 500 ETF (SPY) is the first ETF, which remains an actively traded ETF today, and it tracks the S&P 500 Index.
Advantages of Exchange Traded Funds (ETFs)
Liquidity
ETFs can be purchased and sold throughout the day over stock exchanges. As a result, some funds are more frequently traded than others. Finding a seller or buyer is easy if a fund is traded more regularly. Consequently, the daily liquidity is much higher.
Lower cost
ETFs have much lower expense ratios than traditional mutual funds because ETFs are passively managed. Shareholders are not mandated to pay for managing the funds on their behalf.
Transparency
ETFs, disclose the fund’s holdings and NAV daily for open-ended and close-ended schemes. In contrast, mutual funds disclose their holdings quarterly to protect confidential portfolio trading details.
Diversification
ETFs allow investors to diversify their portfolios across horizontals such as industries, sectors, styles, or countries. ETFs are also traded globally for virtually every major asset class, currency, and commodity.
Tax-Friendly
ETFs are tax-friendly. These attract capital gain and dividend taxes. The amount of fees charged is relatively on the lower side.
What is an Exchange-Traded Mutual Fund (ETMF)?
An exchange-traded mutual fund (ETMF) is a mutual fund available in the guise of an ETF. This exchange-traded security combines an exchange-traded fund (ETF) and an open-end mutual fund. It is also known as an exchange-traded managed fund.
What are the features of ETMFs?
- Exchange-traded mutual funds (ETFs) are shares listed on exchanges and available for ordinary investors to buy and sell on the secondary market.
- The fund’s next daily NAV is considered as ETMF prices. On the contrary, ETF prices are primarily determined in the market during trade execution.
- Exchange-traded mutual funds have the benefits of both mutual funds and ETFs. The advantages of investment strategies of an actively managed mutual fund and the performance and tax efficiencies of an ETF are combined here.
How do ETMFs trade?
ETMFs is a standard net asset value (NAV) based mutual fund to trade on a stock exchange in real-time. It is similar to trading a stock or ETF. ETMF intraday trading prices will be directly linked to the fund’s next end-of-the-day NAV. All bids-offer and trade prices will be quoted as premium or discount to the end-of-day NAV. Here the premium or discount to NAV is locked in for each trade at trade execution time. Correspondingly, the final transaction price is determined once NAV is calculated at the end of the day.
How do ETMFs differ from ETFs?
- Like a stock, ETF is a basket of securities that trade on an exchange. ETFs can contain investments like stocks, commodities, bonds and even international holdings. As a result, ETF share prices fluctuate throughout the day as the ETF is bought and sold, whereas mutual funds only trade once a day after the market closes.
- ETFs are passively managed. The purpose is to match a particular market index. An investor in an ETF does not want fund managers to manage their money like deciding which stocks to buy/sell/ hold but wants the returns to mimic those from the benchmark index. Moreover, ETFs do not try to outperform their corresponding index. They replicate the Index’s performance. However, most mutual funds are ‘actively’ managed and continually trade assets to outperform the market.
- Expense ratios and broker commissions are low in ETFs than in buying the stocks individually. ETFs typically have lower administrative costs than an actively managed mutual fund.
ETMFs are a blend of advantages of both ETFs and mutual funds. So, if you are willing to gain from ETMFs, consider consulting a financial advisor before investing.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh