Exchange Traded Funds and Gold Exchange Traded Funds | Top MBA college in Bangalore

Posted by Prof. Kuldeep Sharma On 07/03/2022 11:00:20

The young Indian retail investors are excited with the new opportunities to invest in the stock market post-Covid-19, rush. A plethora of new instruments of investment are available to choose from and experiment with. Today we will discuss the exchange-traded funds and gold traded funds. Top MBA college in Bangalore

Normally, investment decisions are a difficult task for retail investors, considering the diverse instruments available for investing.  An ETF (exchange-traded fund) is a pooled investment vehicle that works similarly to a mutual fund. ETFs often track a certain index, sector, commodity, or another asset, but unlike mutual funds, they can be bought and sold on a stock exchange just like a regular stock. An ETF can be structured to follow anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to follow particular investment strategies. Best B-school in Bangalore

The price of an ETF’s shares will fluctuate throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange, and which trade only once per day after the markets close. Additionally, ETFs tend to be more cost-effective and more liquid compared to mutual funds. An ETF is a kind of fund that holds multiple underlying assets, rather than only one like a stock does. Because multiple assets are included in an ETF, they can be a better choice for diversification. ETFs can thus contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector.

According to Investopedia website “In USA, the first ETF was the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, and which remains an actively traded ETF today.”  Nippon India ETF Nifty BeES, India's oldest ETF, has completed 20 years since its launch on 28 December 2001. The exchange-traded fund (ETF) was originally launched as part of Benchmark Mutual Fund, which accounts for the BeES part of its name.

Variety of ETFs: Various ETFs are available to investors to invest, income generation, and speculation to hedge or partly offset risk in an investor’s portfolio.  

  1. Bond ETFs: These are used to provide regular income to investors. Their income distribution depends on the performance of underlying bonds. They might include government bonds, corporate bonds, and state and local bonds—called municipal bonds. Unlike their underlying instruments, bond ETFs do not have a maturity date. They generally trade at a premium or discount from the actual bond price.
  2. Stocks ETFs: These comprise a basket of stocks to track a single industry or sector. The aim is to provide diversified exposure to a single industry, one that includes high performers and new entrants with potential for growth. Unlike stock mutual funds, stocks ETFs have lower fees and do not involve actual ownership of securities.
  3. Industry/Sector ETFs: The idea behind industry ETFs is to gain exposure to the upside of that industry by tracking the performance of companies operating in that sector. One example is the technology sector, which has witnessed an influx of funds in recent years. At the same time, the downside of volatile stock performance is also curtailed in an ETF because they do not involve direct ownership of securities.
  4. Commodity ETFs: These funds invest in commodities like crude oil, gold, etc. Holding shares in a commodity ETF provides diversification and it is also cheaper than physical possession of the commodity.  This is because the former does not involve insurance and storage costs.
  5. Currency ETFs: These track the performance of currency pairs, consisting of domestic and foreign currencies. Currency ETFs serve multiple purposes. They can be used to speculate on the prices of currencies based on political and economic developments for a country. They are also used to diversify a portfolio or as a hedge against volatility in forex markets by importers and exporters. Some of them are also used to hedge against the threat of inflation. There’s even an ETF option for bitcoin.
  6. Inverse Leveraged ETFs: Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price. An inverse ETF uses derivatives to short a stock. Essentially, they are bets that the market will decline. When the market declines, an inverse ETF increases by a proportionate amount.
  7. Leveraged ETFs: These ETFs seek to return some multiples (e.g., 2 times or 3 times) on the return of the underlying investments. For instance, if the S&P 500 rises 1%, 2 times leveraged S&P 500 ETF will return 2% (and if the index falls by 1%, the ETF would lose 2%). These products use derivatives such as options or futures contracts to leverage their returns. There are also leveraged inverse ETFs, which seek an inverse multiplied return.

Gold, which has been used as a currency, commodity, and investment for thousands of years, is popular among today's investors as a hedge against currency depreciation, inflation, and deflation, as well as a "safe haven" during times of economic turmoil.

Gold ETFs

ETFs, unlike actual gold, can be bought and sold like stocks on a stock exchange. ETFs allow investors to gain access to gold without the expenses and hassles of markups, storage, and security threats associated with real gold. The expense ratio of a mutual fund causes an investor to lose a percentage of his or her investment each year.  It is important to research the various costs, fees, and associated expenses of each type of investment and your learning will improve your earnings.


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