Introduction to Exchange Traded Fund (ETF):
ETFs are types of Mutual Funds that aim to track the performance of a specific index such as NIFTY 50, NIFTY Next 50, NIFTY Bank, etc. Index is basket of stocks representing certain segments of markets. For example, NIFTY 50 is basket of top 50 companies on National Stock Exchange, which are chosen from different sectors of the economy.
ETFs invest in same stocks as the ones in index & in same proportion as their weight in index. Hence, they are able to mirror performance of underlying index.
These ETFs can be based on indices tracking various asset classes like equity shares (e.g. NIFTY 50 ETF), bonds (e.g. 10-year G-Sec ETF), Gold (e.g. Gold ETF), Tri-party Repo (e.g. Liquid ETF), etc.
ETFs are called passive funds because the fund manager does not try to outperform the benchmark index but instead tries to mirror its performance. For example, a NIFTY 50 ETF seeks to generate return which is similar to NIFTY 50 Total return index. As no active fund management is involved – the fund management fee is very low & so cost saving is high for investors that impacts returns over longer term.
Lower expense ratio than active equity funds since active fund management is not required. Impact of low cost on superior returns is significant especially over longer term & hence ETFs have managed to outperform actively managed funds
NIFTY 50 ETFs have outperformed 96% of large cap mutual funds in previous 3 year and 5 year periods respectively (as on March 31, 2021*). With large cap funds finding it increasingly difficult to outperform benchmark indices like NIFTY 50, ETF provides a low-cost investment avenue to take exposure of various segments of the markets including large caps
ETFs trade on exchange and can be bought & sold just like stocks throughout the day at price close to Live NAV (real time prices VS end of day NAV as in case of other mutual funds). There is also no exit load
Portfolio is disclosed on a daily basis and replicates the return of the underlying Index (subject to tracking error)
*Source: ACE MF. ETF performance is compared against 28 large cap funds Regular plan (Growth).
Investors should read the offer document to know in details about the product. Past performance may or may not sustain in future
Exchange Traded Funds (ETFs) are a professionally managed investment instrument like Mutual Funds. Both provide access to securities and asset classes depending on the desired risk return objective of the fund. The key differences between ETFs and Active Mutual Funds are mentioned in the table below.
|Parameter||Exchange Traded Fund||Active Mutual Funds|
|Trading||Listed and traded on exchange just like stocks||Open ended mutual funds are not listed on exchange|
|Transaction Price||Can be bought and sold at live Nav (iNAV), hence investor can use intra-day market movement||Open ended mutual funds are Price bought and sold only at day closing NAV|
|Returns Objective||Aims to generate returns which are similar to the benchmark Index||Aims to generate returns based on fund manager’s skills & views and aims to outperform the benchmark Index|
|Portfolio||Replicates the portfolio of the benchmark Index||Portfolio is created based on fund manager’s views, within the investment objective of the fund|
|Cost||Lower cost since active management of the portfolio is not required
Average expense ratio of Nifty 50 ETFs is 0.08%*1
|Active management of portfolio, etc. leads to higher cost
Average expense ratio of large funds is 2.2% (Regular)*2
|Exit Load||No Exit Load||Can have Exit Load|
*Source: ACE MF. *1 Average of 17 NIFTY 50 ETFs. *2 Average of 28 large cap funds Regular plan (Growth).
Behaviour of Plain vanilla ETFs and open ended mutual funds are explained in this note.