ETFs

Introduction

I love ETFs. They are my preferred financial instruments of choice. And within ETFs, I prefer index funds. I prefer purchasing ETFs via SIPs - both ICICI and HDFC trading accounts allow that for a pretty small fee.

Terminology

• ETF: ETF is short for Exchange Traded Funds. These are just like mutual funds with one major advantage - in mutual funds, you can only sell back the units to the fund. In ETFs, these units can be bought and sold in the market just like any other stocks. Further derivatives (options and futures) on ETFs are also available and can be bought or sold.
• Active strategy: An active strategy tries to increase returns by trying to time the market - basically buy when the market is low and sell when it is high.
• Passive strategy: A passive strategy is a simple buy and hold. A basket of shares is created and then it is held for a long time (often several years) without any changes.
• Index: An index (like the BSE Sensex or the NSE Nifty) is basically a basket of stocks in a certain ratio. The index value is basically an average of the prices of the stocks weighted by the ratio in the basket.
• Index funds: These are mutual funds that track a certain index. In the best case, they purchase stocks in the same ratio as the index. Often, however, they purchase a subset of the stocks in a different ratio but these are so chosen to closely monitor the index.
• SIP / SEP: A SIP is a systematic investment plan while a SEP is a systematic equity plan. Basically these involve buying a small amount of stocks of units every few days (or every month) rather than all at once.

My reason for preferring ETFs are that they combine high returns with low hassle and good liquidity. Readers of my earlier post on liquidity will understand why it is so important. Unfortunately, it is very difficult to combine liquidity with high yields. Index fund ETFs are the closest that we get to the ideal.

Returns

First, let us look at returns. Elementary finance teaches us that the best risk-return ratio belongs to index funds - basically nobody can beat the market. Why that is so is the subject of another blog post but take it as gospel for now. This gives us the following rules of thumb

1. Mutual funds are better than individual stock.
2. Market index funds (like Nifty) are better than sectoral funds.
3. Passive strategy is better than active strategy.

The first is obvious since individual stock prices vary very much and so are risky. The second is a simple corollary. The third is surprising because EVERY mutual fund will say the opposite. What they do not tell you is that the charge for active strategy are high than for passive strategy so they have a vested interest in be-fooling you.

My preferred ETF - the NiftyBees (by Goldman Sachs) has an annual charge of only 0.5%. By contrast most mutual funds charge between 1-2%. Over a 20 year period, this itself will result in a 12-40% difference in returns.

Liquidity

Since ETFs can be traded, you can sell them via a trading account and get the money in 2 days. Hence, in case of an emergency, you will have cash in 3-5 days. Further, since they are index funds, you will not lose significantly due to market volatility.

Hassles

If you have a demat account, a trading account and a netbanking account, starting ETFs is a 2 minute job once you have decided on the ETF and amount. I suggest investing via SIP / SEP You just need to log into your trading account, go to the section on SIP / SEP, enter the ETF, the quantity and frequency and press enter. Every month, the set amount of units will be purchased and your netbanking account debited with the money.

Find the Best Places to Put in your Money

If you are planning to enter into the stock market, it is true that you might think of getting a considerable return from your investment quantity that ought to be greater than what you had get by spending your cash into mutual funds or also certificate of deposits having no risk where returns are particular. So, it is ideal the best site to invest wealth.

It should be learned that knowing where to spend cash is not a matter of making out instructions from experts in a foreign country. It is in fact about reaching your cash in the best places.

With the help of wide exchange-traded funds or ETFs that control entire areas of the world and every market. Though there are some risks, ETFs reduce those risks by merging investable businesses into simple tickers that you can purchase as well as sell securely through your dependable brokerage.

Various advantages of ETFs-

• Simple - purchased and sold just as shares. These are very easy or simple to deal.
• Diversification – These Easy Traded Funds are very helpful addition to a reasonable portfolio and permit you to access entire indices that are based in a variety of nations. 
• Comprehensible pricing - Since ETFs are purchased and traded like shares, average commission rates are applicable while you purchase or sell online.
• Taxation –ETFs in most cases are offshore funds and definite taxation rules are related to investors.

  Generally, if the offshore fund possesses reporting status then profits are subject to capital gains tax but if an offshore fund doesn’t have any reporting status then profits are dependent on income tax.

More Efficient Than Mutual Funds

ETFs are more inexpensive than conventional mutual funds for a lot of reasons. For beginners, many ETFs are the index finances, and following an index is naturally less costly than active management. However,ETFs that are index-based are more economical than mutual funds that are index-based.

Some places to buy ETFs are as follows-

Vanguard FTSE Emerging Markets ETF (VWO)
 

• Supplies in stocks of corporations located in developing markets all over the world, for example China, Taiwan, and so on. 
• The purpose is to directly track the yield of FTSE Emerging Index. 
• Possesses much possibility for growth, in spite of having risk. 
• Only suitable for long-term aims.

SPDR Emerging Markets Small Cap ETF

The SPDR Small Cap ETF wants to give investment outcomes that, before payments and expenses, match generally to the entire return activity of the S&P Emerging Markets ETF

iShares MSCI EAFE Growth ETF

1. Exposure to a wide variety of companies in the continent of Europe, Asia, as well as the Far East whose profits are expected to develop at an above-average speed in relation to the market.

2. Access to a definite kind of EAFE stocks

3. Take an global stock allocation to the growth stocks

iShares MSCI EAFE Value ETF

1. Contact with a large number of companies in various continents that are considered to be underestimated by the market.

2. Aimed at access to a definite kind of EAFE stocks.