Thread by @tradersushma

A Thread on🧵

BASICS of ETFs

(INDEX INVESTING)

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#etfseriesbytradersushma
#passiveinvesting

ETFs are the most talked about investing products in recent times. As simple as it sounds, it is quite complicated & risky if not understood properly. ETFs & Index Funds are the two main financial products of passive investing or indexing.

ETF is a vast topic to understand. Single post is not enough to cover all its aspects. So I'll post a series of threads on this subject. This is the 1st one in the series so I’ll stick only to the basics.

♦️ WHAT ARE ETFs ♦️

An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. In simple terms, ETFs are funds that track indexes such as Nifty50 or Sensex, etc.

As the name suggests ETFs are Funds (basket of stocks) that can be traded on the exchange just like individual stocks. They have qualities of both funds & the stocks.

ETFs invest in same stocks which comprise the benchmark index in the same weightage.

When we buy a share/unit of an ETF we are buying the shares of the companies which comprise the index which the ETF is tracking.

The shares/unit of an ETF can be purchased or sold on exchange the same way as a regular shares of a company.

♦️ HISTORY OF ETFs ♦️

ETFs were first introduced in the USA in 1993. However, Index Funds came into existence in 1976 by Mr John Bogle when he started the first retail index fund “Vanguard 500”.

In India first ETF was launched in 2001 - Nifty Benchmark Exchange Traded Scheme (Nifty BeES) launched by the Benchmark Mutual Fund. It got listed on the NSE and tracked the Nifty 50 Index.

Since then, ETF has been on a growth trajectory although it has very low penetration in India as compared to the developed nations. Awareness & knowledge is missing in the general investor population.

♦️ SOME HIGHLIGHTS of ETFs ♦️

💠 ETFs are a basket of stocks. They are a complete portfolio of stocks which comprise the benchmark Index which that ETFs is tracking.

💠 The price of ETF is based on the NAV of the underlying stocks in the Index.

💠 ETFs have the features of both stocks & MFs. Like stocks they can be traded on an exchange through a stock broker & like MF they have a diversified portfolio of stocks.

💠 ETF prices fluctuate throughout the day as they are bought & sold.

💠ETFs are passively managed. They do not try to beat the index. They just have to match the performance of the designated benchmark.

💠ETFs can be used for investment, trading, hedging or arbitrage.

♦️ TYPES OF ETFs ♦️

Any asset class which has an index & is liquid enough to trade can be offered as an ETF. Some examples are

•Equity
•Gold
•Bonds
•Real Estate
•Currency

♦️ ADVANTAGES OF ETFs ♦️

This is the most important aspects to be understood. ETFs offer various advantages over the active funds or for that matter any single stock. We shall discuss all of them in detail.

🍁DIVERSIFICATION

Since ETFs are invested into a basket of stocks, one's investment is diversified & concentration risk is eliminated. Investors are not required to manage their asset allocation as it is already taken care of by the fund.

So, ETFs allow long-term investors to diversify their portfolio at one shot. They can also get exposure to countries/markets/sectors depending on the index.

🍁NO MANAGERIAL RISK

In ETFs no fund manager is required as it is managed passively. So Managerial risk is mitigated. While actively managed funds depend upon the skills of the fund manager & in case his decision goes wrong investor has to suffer the loss.

🍁COST-EFEICIENT

ETFs charge lower fees than index funds as they are passively managed & incur lower administrative expenses. But there may be some brokerage involved as with stocks.

🍁DIVIDENDS ARE REINVESTED

Unlike stocks the dividends received here are reinvested into the ETFs. This ultimately increases the return over longer period of time.

🍁TRANSPARENCY

Since the ETFs track an Index, the holdings are already known to the investor. Portfolio disclosure is on real time basis by the fund. So, there is total transparency unlike active funds who disclose their portfolio on monthly basis.

🍁AFFORDABILITY

One can buy units/shares in ETFs with quite low investment amount. This is not possible if you buy all the stocks of the basket directly from the market.

🍁CASH EQUITISATION

Suppose an investor is sitting on cash & is yet to decide upon the stocks in which to invest. He can invest in ETFs temporarily before deciding upon which stocks to buy or wait for the right price level.

That's all for this thread.

I have only covered the basics but there are various aspects yet to be discussed in forthcoming threads. Some of the topics to be covered later are
🔹Disadvantages of ETFs
🔹How does ETF work
🔹Tracking Difference

🔹Comparison of ETFs with Index Funds, Equity & Futures
🔹ETFs are suitable for which investors
🔹Caution to be noted while investing through ETFs
🔹Taxation on ETFs

If u have some queries wrt to this topic or want to add something, feel free to do the same in reply section.

Kindly RT the 1st post in this thread for wider audience.

Thank u for your patience!

Keep learning & earning.