ETFs are a sound investment plan, offering a cost-effective avenue to participate in the stock market, providing exposure without the burden of high expenses. Listed on exchanges and traded similarly to stocks, they provide liquidity and real-time settlement.
Notably low-risk, ETFs replicate stock indices, presenting a diversified investment approach, in contrast to concentrating on a select few individual stocks. In the past five weeks, emerging market ETFs saw continuous outflows of almost $5 billion, while India stood out with the largest inflow of $132.5 million.
Advantages of ETFs that elevate portfolio performance
In the initial half of 2023, active ETFs demonstrated a growth rate of 14%, outpacing the growth of passive ETFs. An ETF is a great method to diversify your stock investments. When you invest in stocks, you can only acquire a certain number of equities based on your investment corpus.
As a result, picking the right stocks becomes critical. However, if you invest in an ETF that follows a sector or asset class, you gain exposure to a broader selection of assets, diversifying and strengthening your portfolio.
- Diversification: ETFs typically hold a collection of assets, providing instant diversification. This can help mitigate risk compared to investing in individual stocks.
- Liquidity: ETFs are traded on stock exchanges throughout the trading day, offering liquidity and the ability to buy or sell shares at market prices.
- Lower Costs: ETFs often have lower expense ratios compared to traditional mutual funds. This cost efficiency can contribute to higher returns for investors.
- Transparency: ETFs disclose their holdings daily, allowing investors to know exactly what assets they own. This transparency enhances the understanding of the fund’s composition.
- Flexibility: ETFs cover a wide range of asset classes, including stocks, bonds, commodities, and more. This versatility enables investors to tailor their portfolios to specific investment goals
Types of ETFs – Explore the Spectrum
Bond ETFs
Ensuring a well-rounded portfolio is key. Smart investors embrace diversity to spread the risk, making it a fundamental practice. That’s why savvy professionals often venture into fixed-income and bond ETFs—yielding stable returns with the added benefit of potentially lower risk compared to their equity counterparts.
Stock ETFs
In 2023, overall stock ETFs increased to $294.6 billion, marking a rise from $292.5 billion. Equity ETFs assemble a collection of stocks to follow a specific industry or sector, such as automotive or international stocks.
The goal is to offer diverse exposure within a single industry, encompassing established leaders and emerging players poised for growth. In contrast to stock mutual funds, these investment instruments boast lower fees and don’t entail direct ownership of securities.
Gold ETFs
A Gold Exchange-Traded Fund is a specialized type of commodity-based Mutual Fund that directs its investments toward assets like gold. These funds work similar to individual stocks, trading actively on the stock exchange.
In October 2023, Gold ETFs experienced the most substantial fund inflows of the year, totalling Rs 1,069.51 crore. The benefits of convenience, liquidity, cost efficiency, transparency, and diversification make Gold ETFs appealing to those seeking exposure to the precious metal.
Also Read: Gold ETF – Features, Investment Process, Tax Efficiency
Currency ETFs
Currency ETFs are where investments unfold in the narrative of a single currency, like the formidable US dollar, or a harmonious ensemble of currency baskets. Strategies may involve direct currency investments, derivatives, or a symphony of both.
However, navigating derivatives requires careful consideration, adding a layer of complexity that demands a clear understanding of your investment. Opt for a currency ETF when anticipating the fortification of the underlying currency or strategically securing and hedging your investment portfolio.
Notably, certain ETFs venturing into global markets come fortified with strategies to navigate the nuanced landscape of currency risk.
ETF vs Mutual Fund vs Stock – A Comprehensive Analysis
| Characteristic | Exchange-traded funds (ETFs) | Mutual Funds | Stocks |
| Investment Type | Index funds tracking a basket of securities | Pooled investments in bonds, securities, and other instruments | Securities providing returns based on performance |
| Pricing Mechanism | Can trade at a premium or a loss to the net asset value (NAV) | Trade at the net asset value of the overall fund | Returns based on actual performance in the markets |
| Trading Hours | Traded during regular market hours like stocks | Redeemed only at the end of a trading day | Traded during regular market hours |
| Cost Structure | Some can be purchased commission-free; generally cheaper due to fewer fees | May have administrative and marketing fees; some may not charge load fees | Commission-free purchase on some platforms; generally no charges after purchase |
| Diversification | Diversifies risk by tracking different companies in a sector or industry | Diversifies risk through a portfolio spanning multiple asset classes | Risk concentrated in the stock’s performance |
| Redemption Method | Trades occur in kind; and cannot be redeemed for cash | Shares can be redeemed for money at the fund’s NAV | Bought and sold using cash |
| Tax Efficiency | Most tax-efficient due to in-kind distributions | Offers tax benefits when returning capital or including tax-exempt bonds | Taxed at either ordinary income tax rates or capital gains rates |
Also Read: Gold Mutual Fund vs Gold ETF
How ETFs Work – the Secret to Wealth Building!
ETFs are like investment funds traded on stock exchanges, mimicking individual stocks. They track indices, commodities, bonds, or asset baskets. The key is their creation and redemption process—large players create or redeem shares, called creation units, in exchange for underlying assets.
ETFs stand out for transparency, with daily disclosed holdings. It also offers intraday trading, unlike mutual funds, letting investors react to real-time market changes. With lower expenses and a mix of diversification, transparency, and liquidity, it is a popular choice for gaining exposure to various assets.
Notably, ETF assets grew by $1.24 trillion (21.1% increase), with domestic equity ETFs rising by $823.57 billion and global equity ETFs up by $239.13 billion since September 2022.
Make informed decisions with the support of wealth advisory firms like Fintoo who leverage the efficiency of robo-advisors and advisors for a seamless investing experience.
Popular Index ETFs in 2023
- Motilal Oswal NASDAQ 100 ETF
- HDFC Sensex ETF
- SBI ETF Sensex
- Edelweiss ETF – NQ30
- UTI Sensex ETF
Challenges & Risks in the ETF Landscape:
- Market Volatility Challenges
The market, in the context of ETFs, represents the broader financial environment where supply and demand dynamics influence the prices of the underlying assets, impacting the value.
- Sector & Industry Risk Factors
Certain ETFs focus on specific sectors or industries, potentially exposing investors to concentrated risks. If that particular sector or industry faces challenges, the ETF may experience significant volatility.
- Liquidity Assessment Risks:
Liquidity refers to the ease with which ETF shares can be bought or sold in the market, influenced by trading volumes and bid-ask spreads, affecting transaction efficiency for investors.
- Currency Fluctuation Hazards:
Currency considerations in ETFs involve the impact of exchange rates, particularly relevant for international or currency-hedged ETFs, influencing returns when converting between different currencies.
- Tracking Error Vulnerabilities
Tracking in ETFs assesses how closely the fund mirrors the performance of its underlying index, with tracking error reflecting any deviation due to factors like fees, management, and market conditions.
- Regulatory Compliance Risks
These aspects encompass the legal framework governing ETFs, including compliance with securities regulations, disclosure requirements, and adherence to specific rules set by financial authorities.
Top Expert ETF Trading Strategies
- Strategic System Investing Plan (SIP):
SIP involves consistent, fixed contributions to an investment fund, fostering disciplined and long-term wealth accumulation through periodic investments.
- Dynamic Market Swing Strategy:
The market swing strategy is a short to medium-term trading approach that seeks to capture “swings” in asset prices, leveraging price fluctuations within a trend.
- Diversified Industry Shuffling:
Industry shuffling involves reallocating investments among different economic sectors based on the anticipated performance of specific industries over various market cycles.
- Tactical Short Selling:
This is a strategy where an investor sells borrowed securities, anticipating a decline in their price, with the objective of buying them back later at a lower cost.
- Risk Mitigation through Hedging:
Hedging involves employing financial instruments or strategies to offset the risk of potential losses in an investment portfolio, providing a protective shield against adverse market movements.
A Conclusive Outlook on ETF Frontiers
ETFs, suitable for individuals regardless of their experience level in the investment realm, provide an array of investment methods and trading avenues, all with the common goal of wealth accumulation. Selecting the most suitable strategy entails clarifying your investment objectives, gauging your comfort level with risk, and outlining the specific asset classes aligning with your financial goals. For tailored guidance in navigating this complex landscape, explore the advisory services offered by FINTOO to enrich and optimize your investment endeavours.
