Exchange Traded Fund:
Exchange Traded Fund is a security that tracks an index, a commodity or a sector like an index fund or a sectoral fund but trades like a stock on an exchange. It is similar to a close-ended mutual fund listed on stock exchanges. ETF's experience price changes throughout the day as they are bought and sold.
Exchange Traded Funds (ETFs) have been in existence in India for quite
some time now. But so far ETFs have not enjoyed the kind of popularity
that the conventional Mutual Funds enjoy. One reason could be the
lack of understanding of the concept of ETF amongst the general investor.
Second, and probably the more important reason, is that ETFs by nature
track a certain index (e.g. S&P BSE SENSEX or the BANKEX). Hence,
the returns one can expect from ETFs will be equal to the rise in
the index. Whereas, India is a growing market and hence offers huge
opportunities in the non-index shares too. Therefore, it is not difficult
for an active fund manager to beat the index and offer better returns.
As such ETFs (and index-funds too, by that logic) have comparatively
negligible AUMs. Two things could, however, make ETFs popular in India
- One, of course, is that as market valuations become fairly or over-valued, it will become more & more difficult to beat the index. Then index-based funds (both conventional MFs & ETFs) may become a better option than actively-managed funds
- Gold ETFs or Real-Estate ETFs have no comparable product in the conventional MF sector, and hence become the only MF route to invest in such markets