A Beginner's Guide to Bitcoin Exchange Traded Funds (ETFs) - Arbismart -  Trusted Transparent Arbitrage Trading - EU Regulated.

Stocks and mutual funds are two of the most popular investment options, but they are also perplexing. If you are an investor, you may have faced a dilemma in deciding which of the two to use for your investment needs. 

While mutual funds provide diversification benefits, stock trading provides convenience. But did you consider what it would be like if there were a product that could give you the best of both worlds? ETFs, or Exchange Traded Funds, are the answer here.

What is an Exchange Traded Fund (ETF)?

ETFs, or Exchange-Traded Funds, are a novel way to invest. Since their debut in the United States in 1993, they have gained worldwide acclaim. ETFs are based on the mutual fund model, in which multiple investors pool one’s funds. These funds will be invested for them by a fund manager. ETFs can hold various investments, including stocks, bonds, currencies, and commodities. 

EFTs can consist of thousands of stocks from various industries, or they can be restricted to a single sector or industry. On the other hand, exchange-Traded Funds are listed and traded on stock exchanges, unlike mutual funds. ETFs, like other stocks, have buyers and sellers, and forces of demand and supply determine their prices.

Exchange-Traded Funds (ETFs) have become the most popular passive investing method in India. This is primarily because mutual funds in India have a higher expense ratio than ETFs. While mutual funds have expense ratios ranging from 1.05 to 2.25 percent, ETFs have less than 1% expense ratios.

Are EFTs only available in Nifty and Sensex?

No, indices are just one of many different types of ETFs available. Index ETFs are, of course, very popular among retail investors. ETFs, on the other hand, are classified into four types. 

  1. There are index ETFs that are linked to the Nifty or Sensex. 
  2. Gold ETFs that are indexed or benchmarked to the market price of gold, typically 24-carat gold, are available.
  3. There are sectoral or thematic ETFs that are benchmarked to a portfolio of stocks in a specific industry, for example, banking ETFs, commodity ETFs, etc.
  4. Finally, international ETFs invest in funds located outside of the United States, Europe, or Japan. These funds are typically sponsored by their parent company, which is based in the United States, Europe, or Japan. Debt ETFs are another type of ETF available.

What are the advantages of EFTs?

Diversification

It is common to think about diversification in terms of broad market verticals — stocks, bonds, or a specific commodity, ETFs allow investors to diversify across horizontals, such as industries. It would take a lot of effort and money to buy all of the components of a specific basket, but an ETF delivers those benefits to your portfolio with the click of a button. 

Diversification can help protect your portfolio from market volatility. If you only invested in one industry and that industry had a bad year, your portfolio would most likely have performed poorly as well.

SMSF friendly

Like other pooled funds, ETFs are qualified investments for Self Managed Super Funds (SMSFs), and their popularity with this client base has grown significantly over time.

Tax Benefits

Over mutual funds, ETFs have two significant tax advantages. If you invest in a mutual fund, you may be required to pay capital gains taxes (profits from the sale of an asset). This is because mutual funds, mainly actively managed funds, frequently trade assets more regularly than ETFs. 

On the other hand, most ETFs only have to pay capital gains taxes when you sell the investment. This indicates that you will pay less tax overall on your ETF investment.

Disadvantages of EFTs

Risk of closure

The main reason for this is that a fund did not bring in as many assets to cover administrative costs. The most inconvenient aspect of a defunct ETF is that investors should sell sooner than they intended — and possibly at a loss. There’s also the inconvenience of having to reinvest that money and the possibility of an unexpected tax bill.

Trading costs

The expense ratio may not be the end of ETF costs. Because ETFs are traded on an exchange, they may incur commission fees from online brokers. Many brokers have decided to eliminate ETF commissions, but not all have.

Tracking error measures the variability in a fund’s performance compared to its underlying index. It is measured by the standard deviation of the daily return differences between the ETF and its underlying index. In layman’s terms, tracking error metrics the volatility in the difference between the ETF’s performance and its underlying index.

Final Thoughts

ETFs, or Exchange Traded Funds, can be a very great investment because they combine the benefits of trading stocks and mutual funds. As previously discussed, ETFs have several advantages over mutual funds, but selecting the right ETF for you is a difficult task. 

If you are new to the world of ETFs and lack prior knowledge or experience about them, it is best to consult a SEBI registered investment manager who can assist you in selecting the best fund for you based on your needs and requirements.