Thursday, April 6, 2017

Stock Market is an Auction Market

Picture shows an auction in progress. Colour Black and white

"In stock markets it's an auction market, and crazy things can happen."
Warren Buffett

Which ETF Has Lowest Cost and Tracking Error?

Picture shows the text "Tracking Error of ETF = 0.02%" in bright orange color

Actual Question:

Which are the index ETFs in India with the lowest cost and tracking errors?


Dear Friend!

Thank you for posing the valuable question.

My answer is that I have not gone into researching these two aspects as in my opinion the outcome of such a research may not yield any significant benefits as the variance maybe minimal.

Now let us take each point individually.

Lowest Cost of ETF:

While there is a huge cost difference between an actively managed mutual fund and an index fund or an Exchange Traded Fund (ETF), competition generally will force the cost difference within each class to be negligible. To elaborate, the annual management fee for an actively managed mutual fund is between 3.00 to 4.00 percent. The fund management fee for index funds and ETFs is below 0.50%.
When we are talking about a very, very long time horizon of investments of a minimum of 30–35 years, for ETFs internally compounding at over 15% per annum, generating an unimaginably huge wealth by the end of that period, a difference of 0.01 to 0.02 percent between various ETFs is not going to matter much.

Lowest Tracking Error:

Basically tracking errors arise when there is a time difference or gap between the change in the index and implementing the corresponding change by the ETF in its own fund.
Again as already explained, small tracking errors are not going to impact the results in any significant way.

What the investor shall actually focus on:

What the investor should actually focus on is work on own temperament and mental framework with respect to the following important aspects of investment:
  1. Incase of small monthly investments, making investments with strict discipline every month, over such long periods like 30–35 years.
  2. To follow the rule, “invest first; spend next” over such long periods.
  3. Keeping investments absolutely intact, without disturbing, selling or liquidating for 30–35 years.

Thank you,

With Best Regards