Exchange-Traded Funds

It is possible to confuse exchange-traded funds with mutual funds going by the name alone. However, they are entirely different from each other. We trade ETFs or exchange-traded funds like shares on the stock exchange.

It is essential to get a thorough grasp of this topic to crack competitive examinations. Therefore, read below to know more about ETFs concerning the IAS Exam.

Latest Developments on Exchange-traded funds

In recent news, the Indian Government set up the country’s first corporate ETF- Bharat Bond Fund in 2019, making exchange-traded funds an essential topic for UPSC.

Here are some features of this investment instrument:

• Bharat Bond ETF is a combination of bonds that the Central Public Sector Enterprises/ Undertakings issue. These are all AAA-rated bonds.
• Bharat ETF will track an index that the National Stock Exchange will construct.
• These bonds will have two maturity series of 3 and 10 years. Each series will have its own index.
• This ETF will invest in the bonds of state-run and other government entities.
• Since these are bond ETFs, taxes will be applicable on them with indexation benefits.
• A unit size is set at Rs. 1000 so that even retail investors can invest.

Stock Exchange is a place where traders buy and sell securities. The major Stock Exchanges in India have been discussed in detail at the linked with the perspective of the upcoming civil services exam.

What Are Exchange-traded Funds?

Exchange-traded funds are marketable securities that track one of the following:

• Index
• Commodity
• An amalgamation of assets like an index fund

Most commonly, ETFs are funds that track an index like the BSE Sensex or the CNX Nifty. Their NAV keeps fluctuating as per market movements. Willing individuals can invest in these funds via a registered stock exchange or a reputable broker.

Features of Exchange-traded Funds in India

Here are some features of ETFs in India:

• One trades ETFs like common stock or shares on the market.
• The sold price of an ETF changes every day, exactly like a stock.
• ETFs have higher liquidity than mutual funds.
• They also have lower fees than mutual funds.
• One manages ETFs passively.

There are three types of funds of the Central Government in India – Consolidated Fund of India (Article 266), Contingency Fund of India (Article 267) and Public Accounts of India (Article 266). IAS aspirants can learn in detail about the three at the linked article.

A few other economy-based topics in line with the UPSC Syllabus are given below:

What Is Meant by Passive Management of ETFs?

A chief characteristic of an ETF is that fund managers run them passively. This fact means that the fund manager does not play an active role in operating funds. All he/she has to do is track the underlying index and make minor changes from time to time in investment style, to ensure that the fund is in line with its index.

Investors do not want a fund manager to choose the assets with the best returns for the fund, as they are looking to mimic the index. For example, it is not possible to purchase the shares of all the scrips on an exchange, says the Nifty 50. Instead, buy the ETF that tracks Nifty.

What Are Some Downsides to Investing in an ETF?

The downside to investing in an ETF are as follows:

• You have to pay a brokerage fee every time you buy or sell an ETF, as these are traded via a stockbroker.
• STT and the usual costs of trading are applicable here as well.

How Are Exchange-traded Funds Different from Index Funds?

ETFs are different from other index funds because they do not try to beat the market but rather try to mirror the market performance.

Index funds, on the other hand, try to outperform a market index. Conversely, ETFs only try to replicate an index’s performance.

Moreover, index funds take their value from the underlying NAVs at the end of the day, but ETFs are priced as per the market value.

What Are the Benefits of Investing in ETFs?

Following are the benefits of investing in ETFs:

• ETFs provide investors with a broad spectrum of the equity market.
• Investors also use them as a hedge against losses.
• Moreover, individuals use them as a place to park cash.

To sum up, Exchange-Traded Funds are similar to both shares and mutual funds while being distinct from both. Knowing the difference among these investment vehicles can help individuals crack important questions in the IAS Exam. They can also seek guidance from subject-matter experts to enhance their competency.