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All you need to know about Exchange Traded Funds (ETF)

Exchange Traded Fund (ETF) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets. They are mutual funds that are listed on the stock exchange and traded like stock units. Much like any other mutual fund scheme, ETFs provide diversification into various tradeable assets like equity stocks, gold etc. ETFs can be a good investment vehicle for those who - wish to delve in the stock market but have limited expertise and want to diversify their investments.


ETFs track a particular index, and Debt ETFs and Gold ETF have their respective benchmark of fixed income indices and domestic gold prices. Please bear in mind that you need to have a Demat account to be able to invest in ETFs.



Advantages of ETFs


Diversification- Vis a vis investing in stocks, wherein you are solely invested in one company and hence at greater risk; investing in ETFs allows you to diversify your portfolio by including multiple sectors in a single unit of ETF.


Lower Expense Ratio- Because ETFs like Nifty 50 ETF are typically passively managed funds, the expense ratio tends to be lower than other kinds of actively managed mutual fund schemes. A passively managed fund is one which does not require the fund manager to actively research and manage the fund’s portfolio. Since ETFs intend to replicate their respective benchmark indices, the need for active stock picking is not required.


Tradability- ETFs provide you with instant gratification when it comes to trading the units. While any other mutual fund unit can only be subscribed or redeemed at a single NAV price for that particular day, ETF units can be bought and sold many times in a day on a real-time basis just like any other stock.


No Managerial Risk-Since ETFs are passively managed funds. Here, the fund manager is only looking to replicate an index

ETFs may be ideal for bringing in the diversity in your portfolio. Consider it a foot in the trading door with a relatively lower expense ratio as compared to other actively managed mutual fund schemes. And with no active stock picking, it incurs lower administrative costs. But please note that the ETFs are subject to the overall market volatility/price fluctuations of the stock market.



ALL ABOUT IT ETF


The COVID – 19 pandemic has got us to look at digitisation in a whole new way. With online meetings, there is an increased dependence on technology. Virtual meet-ups and video conferences have become a way of life for us. We are adapting to newer platforms of technologies like never before on a personal level too. The new normal of life includes virtual house parties, digital video conversations, and live movie streaming with online companionship. The buzz around Artificial Intelligence (AI), Cloud Computing, Virtual/Artificial Reality, 5G networks, and Cybersecurity has gathered renewed momentum. All this has increased the demand for digital services and the Information Technology (IT) sector in general.


What is an IT ETF?


An IT Exchange Traded Fund or IT ETF has features similar to investing in both direct shares on the exchange as well as making investments in any other open-ended Mutual Fund from the IT sector. Being ETFs, these are listed on the stock exchanges and can be transacted during the market trading hours. IT ETF tracks benchmark index that measures the performance of the Information Technology Sector Index, subject to tracking errors.


Why now?


Now maybe a good time to invest in IT ETFs –


Growing and new demand

The COVID-19 pandemic has accentuated the shift toward the online and digital way of working for companies and individuals. So, companies and Governments are expected to increase budgets on IT and digital services to expand their footprint.


Potential Currency Upsides

Most of the IT services and products companies have MNC clients based in the USA and Europe. Because of the export of IT services, the revenues earned are in USD and Euro, while most of the costs are incurred domestically in India. So, IT companies make higher profits, generally on account of depreciation of Indian.


Rupee against USD and Euro.

Relatively Unaffected delivery models The Information Technology Service Delivery models are relatively less impacted during Covid-19 pandemic. In fact, this is one sector for which the pandemic has proved to be a blessing in disguise. Most IT companies were able to successfully transition their employees to a WFH (Work from Home) environment while offering seamless and uninterrupted services to their clients.


Potential for Improved Margins

The companies were able to save on travel, administration, & other operating costs while keeping the delivery of services to clients intact. With the growing use of online meetings, online banking, and essentials getting delivered via digital platforms; the IT companies have played a vital role in changing the way how things used to be before COVID 19. Thus, this helped showcase a great potential for business growth and better margins.


Benefits of Investing in IT ETFs:


1. Own Top IT stocks: This ETF provides exposure (based on Benchmark Index Methodology and Free-Float market capitalisation) to top IT stocks in the market – You no longer need to worry about owning individual stocks. These Funds invest in the entire basket of IT stocks forming part of the underlying index.


2. Avoid stock-picking risk: Also known as non – systemic risks, it means a risk that is associated only to a particular company. Investors are generally advised to stay protected against non-systemic risk. Investors may be able to mitigate this risk from the active stock picking and fund manager selection by investing in ETF.


3. Trade in Real-Time Basis: It provides you with the flexibility to trade in Real-Time Basis - As it is an ETF listed on the stock exchange, it can easily be traded just like any other stock. This provides you with the flexibility to enter and exit at any time during trading hours.


4. Low-Cost Investment – As ETF does not involve any research expenses, ETF products are generally available at a lower cost than most of the other open-ended mutual funds.



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