Exchange-traded funds are an attractive option for investors who have a flavor for investing in the stock markets through mutual funds.
Exchange-traded funds (ETFs) are an attractive option for investors who have a flavor for investing in the stock markets through mutual funds. They offer lower operating costs than traditional open-ended mutual funds, greater transparency, are tax efficient and provide greater liquidity as they can be bought or sold throughout a trading day. ETFs’ trading value is based on the net asset value of the underlying stocks that they represent. There are also many advantages of investing in ETFs.
Advantages to Investors:
# Liquidity: Exchange traded funds can be bought and sold anytime during market hours at a price close to the actual NAV of the scheme.
# Limit Order: Ability to put limit orders.
# Flexibility: Enjoy flexibility of a stock and diversification of index fund.
# Easy: ETFs can easily be bought / sold like any other stock on the exchange through terminals.
# Low cost: ETFs make an affordable investment due to their lower expense ratios than a mutual fund.
# Arbitrage: Provides arbitrage between futures and cash market.
# Tax Advantage: Buying and selling of shares in the open market do not impact the exchange-traded fund’s tax obligation. This is the reason exchange traded funds are tax efficient.
# Transparency: There is a high level of transparency in ETFs as the investment holdings are published every day.
# Exposure: Exchange traded funds provide diverse exposure to specific sectors as the case may be.
“A portfolio of ETFs would be the right strategy for investors interested in going forward with investing in the stock markets through mutual funds. The first step would be to identify and include all asset classes’ viz. equity, debt and commodity to create the right diversification. For the equity portion of the portfolio it is advisable to choose the funds in different sectors which are un-correlated or the degree of correlation is significantly lower,” says Rahul Agarwal, Director, Wealth Discovery.
For example, a right mix of sectors could be healthcare, banking and FMCG as these three are potentially uncorrelated. An alternative to this strategy is to go for an index-based ETF. Like, ETFs that track the broader market such as Nifty 50 and supplement this with an ETF focused on banking for extra returns. An ETF focused on the FMCG sector or some other, e.g. the CPSE index, can also be added to provide some stability.
“Debt ETFs in the portfolio would add to the right mix of conservatism that is required for a diversified portfolio. In our opinion ETFs focused on long-term debt such as G-Secs would make an ideal choice. A simple strategy for choosing a debt-focused ETF is to choose from the best performing ETFs focused on the debt markets,” says Agarwal.
It is also important to add ETF’s from the commodity sector for diversification purposes. For commodities ETF and from the perspective of the Indian markets, we would suggest opting for Gold ETFs. The reason being that Gold ETFs have been around for a long time and do provide ample liquidity to trade in and out at a reasonable cost.
Based on the strategy underlined above, here’re 5 ETFs that are well diversified, have a track record of good returns in their category, and are amply liquid and low-cost investment alternatives, and should not be ignored while creating a diversified portfolio of ETFs.
# ICICI Prudential Nifty iWIN ETF
Investment Objective: To provide returns before expenses that closely corresponds to the total return of the Underlying Index Nifty50.
Fund Class: Index ETF
AUM (Cr): 1,033.57
# Reliance ETF Bank BeES
Investment Objective: To provide returns that, before expenses, closely corresponds to the total returns of the securities as represented by the Nifty Bank Index.
Fund Class: Sector ETF
AUM (Cr): 2,568.09
# Reliance ETF Gold BeES
Investment Objective: To provide returns that, before expenses, closely corresponds to the returns provided by Domestic price of Gold through investment in physical gold.
Fund Class: Gold ETF
AUM (Cr): 2,571.89
# Reliance ETF Liquid BeES
Investment Objective: To provide current income, commensurate with relatively low risk while providing a high level of liquidity, primarily through a portfolio of treasury bills, government securities, call money, Collateralised Lending & Borrowing Obligation (CBLO)/ similar instruments, repos and reverse repos and other money market instruments. There can, however, be no assurance or guarantee that the investment objective of the scheme will be achieved.
Fund Class: Debt ETF
AUM (Cr): 1,604.91
# CPSE ETF
Investment Objective: To provide returns that, before expenses, closely correspond to the total returns of the securities as represented by the CPSE Index, by investing in the securities which are constituents of the CPSE Index in the same proportion as in the index.
Fund Class: Sector ETF
AUM (Cr): 585.44
Summary of Returns
|ICICI prudential Nifty iWIN ETF|
|Reliance ETF Bank BeES|
|Reliance ETF Gold BeES|
|Reliance ETF Liquid BeES|
(Disclaimer: These ETFs have been recommended by Wealth Discovery. Since a major portion of this portfolio of ETFs are managed by Reliance Asset Management Company, they have made it clear that this is not an endorsement of the company per say. “We just found them to be the best in their class. We also recommend that all advice should be taken with a grain of salt and investors should do their own due diligence before committing any funds to any of these ETFs that we have talked about,” Agarwal says.)