Some important factors that investors should look at while investing in ETFs are collated for your reference.
You can go through these to be able to make a smart choice for yourself.
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Liquidity: Liquidity of an ETF makes it easy for investors to buy or sell on the stock exchange. This implies that there should be enough trading volumes of the ETF on the exchanges during the day. Generally, ETFs with a larger investor base have higher liquidity on the exchange.
- Lower tracking error: Tracking Error is the difference between an ETF and its benchmark. Closer the returns of an ETF to that of the benchmark index, lower is the tracking error. Low tracking error is an important factor that the Investors should look at over long periods of the scheme's existence.
- Soft impact cost: Soft impact cost is an indirect cost of executing a transaction on an exchange. Higher the liquidity, lower the impact cost and therefore lesser the indirect cost to investors. When such orders are executed, chances are that the underlying security will fluctuate and, hence, increase the purchase costs. One needs to watch out for this cost.
- Low expense ratio: Annual charges of an ETF are shown in its expense ratios which include, fund expenses, including: management fees, administrative fees, operating costs; and all other asset-based costs incurred. One should not see expense ratios in isolation, but also see liquidity and historical track record. (One basis point is one-hundredth of a percentage point.)
Because of the passive nature of the fund, and their structure that closely follows an index, most ETFs have lower costs than other equity funds.
- Benchmark: To choose and ETF, you should first decide on the market, market segment, or industry sector you wish to track, and then decide on the appropriate index for that market. Construction methodology is different for every index provider which results in wide variations in turnover and other portfolio characteristics. Benchmarks that track the same market segment can deliver very different results.
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A few Comparisons for ETFs and other investment options to help you make the investment of your choice:
ETF v/s Mutual Funds
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ETF
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MUTUAL FUNDS
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ETFs are passive by design
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Mutual Funds investments may be either actively or passively managed
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Passive ETF mutual funds are designed to mimic an index focusing on equities or commodities of a basket of an asset class
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In actively managed funds, a team of fund managers select securities with the intention of outperforming the index
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In an efficient market, where it is difficult to outperform the index, fund managers often suggest investing in passive funds
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Active funds are popular for exceeding in the general market and thus show higher growth potential
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ETFs that do not track indexes publish their full portfolios on a daily basis, providing ongoing portfolio transparency
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Actively managed mutual funds publish their portfolios only after a lengthy time lag, as transparency is actually likely to be detrimental to their business prospects
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ETF v/s Index Funds
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EXCHANGE TRADED FUND (ETF)
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INDEX FUNDS
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Pricing and Trading
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ETF prices are 'Live' / 'Realtime' on the stock exchange and can be traded like individual stocks
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The Net Asset Value (NAV) is determined at the end of the trading day
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Transaction Cost/Fees
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ETF's have low expense ratio and transaction costs are similar to an individual stock traded on the exchange
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There are few transaction costs and the index fund charge Management expenses on the fund
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Tracking Error
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ETF's don't have to keep funds aside for liquidity, hence they are able to track an index more closely
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Index fund managers have to keep certain percentage of funds aside to ensure liquidity to buyers and sellers. Hence, they are less effective in tracking an index
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Portfolio Disclosure
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ETF's disclose their holdings on a daily basis
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Index funds disclose their holdings on a periodic basis
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GOLD ETF
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PHYSICAL GOLD
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Quantity to buy/sell
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Available in small quantities, hence are more affordable
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Available in standard denomination, which requires large investments
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Mode of storage
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Available in dematerialised form, they can be stored electronically. Hence, they also eliminate the risk of theft
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Normally available in bars they need to be stored in lockers or safety vaults
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Convenience
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They are held electronically hence physical handling is eliminated
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In buying and selling they need to be moved physically from one place to another
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Pricing
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Pricing is done as per international standards and is always transparent
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Prices are never uniform, and differ from one jeweler to other
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Purity
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Fund house ensures the quality of the same
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Always comes with a question of purity in mind
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Charges
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Have ETF management fee as well as brokerage charges associated with each transaction
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Other than the charges for delivery, no other charges are involved in case of physical gold
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