Exchange-Traded Funds: Advantages of ETFs

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Advantages of Exchange Traded Funds | WealthDesk

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An ETF stock is a basket of securities that tracks an underlying index. ETFs invest in shares of the companies, fixed income securities including bonds, commodities like gold, and other securities. These securities are called the holding of the ETFs. 

Since stock market ETFs are a relatively new form of investment in India, many investors have questions like “How to invest in ETF stocks?” and “are ETFs traded on exchanges?”. ETF investments are pretty simple as the name suggests, ETFs trade on stock exchanges. Investors can trade the units of their ETF stocks on the stock exchanges throughout the day. ETFs also provide enough liquidity to the investors, thereby reducing liquidity risk. 

Different types of ETFs in India

ETFs in India include Equity ETFs, Fixed Income ETFs, Index ETFs, Commodities ETFs, Real Estate and Infrastructure ETFs, etc. While stock market ETFs / equity ETFs are funds that invest in the common stock of various companies, index funds invest in stocks that constitute part of a particular index (Nifty, Sensex, etc.). Bond ETFs invest in fixed-income securities, whereas commodity ETFs invest mainly in precious metals and natural resources. REITs & InvITs invest in revenue-generating real estate and infrastructure projects, respectively.

Advantages of ETF investments

ETFs provide a one-stop investment solution for investors wanting to diversify their portfolios at a lower cost and through ease and convenience. There are numerous advantages of ETF investments for investors. Some ETF advantages are listed below:

  • ETFs are Operationally Convenient

Stock market ETFs provide exposure to multiple securities through the execution of single trade. Thus, ETF stocks provide operational advantages to investors. Direct investment in securities entails executing multiple trades to gain exposure in various securities, which becomes cumbersome for the investors.

  • ETF investments are easy to trade

ETF stocks trade like common shares on the stock exchanges. The ETF prices are updated continuously throughout the day. Investors get hassle-free trading experience in ETFs.

  • ETFs provides Diversification

Since ETFs invest in multiple securities, it provides Diversification to the investors. Investments in a particular stock expose the investor to concentration risk. ETFs diversifies the portfolio to include various securities.

  • ETFs Reduces Risk

Best ETFs in India provide adequate Diversification in the portfolio, thereby investing in ETFs reduces the risk for the investors. Holding individual security may be risky because any downward movement in the stock price leads to losses for the investor. On the contrary, ETFs are well diversified to prevent any volatility in single security from affecting the entire portfolio.

  • ETFs Reduces Cost

One of the vital ETF advantages is that ETF investments reduce costs for the investors. ETFs do charge some amount as fees for managing the funds. However, those are generally lower in comparison to other actively managed funds. Cost reduction is one of the significant advantages of ETFs over Mutual Funds.

  • ETFs provide Investment Avenues

REITs and InvITs provide exposure to real estate assets and infrastructure assets to the investors. For retail investors, owning property or an infrastructure project is a costly affair due to hefty investments. In such a scenario, REIT and InvIT expose the investors according to their risk & investment appetite.

Advantages of ETFs over Mutual Funds

Broadly, ETFs and mutual funds are similar because they pool money from the investors and invest in various securities. ETFs and mutual funds provide Diversification to the investors and thereby aim to reduce risk. However, ETFs have some advantages over mutual funds. Some of the ETF advantages are listed below.

  • Minimum Investment Amount

Some mutual funds have a minimum investment amount. ETFs, on the other hand, do not have any minimum investment amount. An investor can purchase ETFs just like a share at the prevailing market prices.

  • Trading of ETFs

ETFs trade over the stock exchanges during the trading hours of the day. Any investment or redemption from a mutual fund is executed on closing NAV at the day end. Thus, live trading is not possible.

  • Arbitrage Opportunities

ETFs provide arbitrage opportunities since ETFs and their underlying securities trade throughout the day on the stock exchanges. Mutual Funds consider closing NAV, thereby eliminating any arbitrage opportunities.

  • Cost Advantages

Most of the ETFs are passive funds. Thus, the management fees are comparatively lower than mutual funds, which trade actively. Mutual funds also incur costs related to marketing which the ETFs usually do not incur.

  • Market reach of ETFs v/s Mutual Funds

ETFs are traded on the exchange, giving them a better geographical reach in comparison to mutual funds. Active marketing is required to increase the reach of mutual funds.

 Best ETF Funds in India

ETF investments deliver varying returns under different time buckets. Some outperform in the shorter period (one week, one month, or one year), while others outperform in the long run (more than one year period). Thus, an investor needs to choose from the best ETFs in India, considering his investment horizon and accompanying risk factors.

A couple of essential factors in selecting the best ETF to invest in are determining the ETFs’ AUM and past five years’ return data.  It is recommended to look at the performance for a longer tenure (5 years and above) because looking at short term data can be misleading as it can be affected by one time events such as Covid-19. Few of the index-based best ETFs in India based on past returns and AUM greater than 100 Cr are listed below:

Name of the FundAsset Size(In crores)Past 05 years Returns
HDFC Index Fund – Sensex2323.9316.01%
Nippon India Index Fund – Sensex166.4815.99%
IDFC Nifty Fund326.2615.36%
UTI Nifty Index Fund4353.1215.30%
HDFC Index Fund – Nifty 503415.3215.23%
(Source: Moneycontrol)

Conclusion

Though the fund size & past performance does not guarantee future returns, it provides comfort due to substantial investor participation and established past precedence. Get in touch with an expert to know more about ETFs, and how you can benefit from buying them. 

At WealthDesk, experienced advisors analyse the best ETFs in India and help investors with their ETF investments. It also allows investors to make informed decisions about different ETF stocks and shares based on their targeted risk and return considerations.

FAQs

How to invest in ETF stocks?

Stock Market ETFs trade on the stock exchanges throughout the day. The price keeps on changing during the trading session, generally in line with the fair value of the ETF assets. Investors can trade their ETFs through the Demat accounts with their brokers.

What are the advantages of ETFs?

ETFs are simple investment products traded over the stock exchanges. ETFs provide operational convenience to the investors reducing risks through diversification. ETFs such as REITs and InvITs provide investors with an asset class different from ordinary stocks and bonds.

Is it better to trade ETFs or Stocks?

Equity ETFs provide different risk-reward opportunities to the investors compared to individual stocks. An investor can consider ETF investments as an alternative to stock investments. However, ETF investment is generally a safer option. Individual stocks investments may go down. But in the case of ETFs, the overall portfolio may not lose much value due to investments in multiple securities.

Are ETF investments and Mutual Fund investments different?

ETF investments are different from Mutual Fund investments. ETFs are passive funds, whereas mutual funds are generally actively managed. Due to this reason, ETFs cost less in comparison to mutual funds to an investor. Also, ETFs trade throughout the day, but the settlement of mutual fund units occurs at the end of the trading session.

What are the advantages of ETFs over Mutual Funds?

Some mutual funds require a minimum investment amount, whereas ETFs can trade in quantities as low as one unit. ETFs also provide cost benefits to investors compared to mutual funds that have a higher expense ratio. Since ETFs are exchange-traded products, they are available for everyone. Mutual funds, on the other hand, have to expand geographically to increase their reach amongst investors.