Exchange Traded Fund Example Slide

Exchange Traded Fund Definition

Definition:

Exchange Traded Fund or ETF is special kind of a mutual fund, which is created and issued by a fund house, whose units are listed on stock exchanges alongside stocks and freely traded like stocks. The ETFs are created based on various underlying assets like stocks, bonds, gold, commodities, or a popular index like ‘BSE Sensex’. The advantage over mutual fund units is that the investor need not approach the mutual fund for redemption and can simply sell on the stock exchange, bringing liquidity to the instrument. The fund management charges are also lower compared to mutual funds since ETFs are passive funds involving minimum time and efforts of fund managers.

Example:

A Few ETFs of Goldman Sachs

What are the Hurdles to Invest and Earn Dividends from Foreign Markets?

Following are the general reasons why people prefer to save and invest and earn returns and dividends from their own country:

1. Familiarity and ease of transaction: People are more familiar with the general economic environment, laws, taxation and so many other related aspects prevailing in their own country. Even the service providers like banks, stock brokers, insurance agents and so forth are also well versed with the systems of the native country. So it is more easy to transact in one own country.
2. Legal Restrictions/ Hurdles: Many countries, including our own India till recently, have legal restrictions in investing abroad, primarily to conserve foreign currency reserves. Even in India until a few years ago there were restrictions, which were eased. Unless revised subsequently, Indians were permitted to invest only up to US$.2.50 lakhs per annum abroad. Even when this is legally permitted, because of political sensitivities surrounding issues like laundering of black-money abroad, even genuine investors may face harassment from various authorities.
3. Costs and Minimum holdings constraints: Once I was seriously exploring purchasing shares in the US, sitting in India. It is quite possible, technically. There are online brokerage firms that permit you to buy on US stock exchanges, but there were many minimum criteria that were impractical for a small investor from India. Suppose there is a minimum trade fee of $10 per transaction it translates into a whopping Rs.670 flat for one transaction that is totally unaffordable. There are many minimum criteria like ledger folio charges, minimum investment amount and so on which make it practically unviable for small Indian investors.

Having said this, Goldman Sachs, a foreign mutual fund operating in India is offering certain limited access to overseas markets through their 'Exchange Traded Fund (ETF)' products. Please see the picture below.

Similarly, a few other funds also may be offering avenues for limited investing abroad.

In conclusion, it is not impossible for investors to make investments and earn dividends and returns from overseas markets, but a few practical hurdles restrict scale of such transactions.

How can Investors Capture the Benefits of the Economic Prosperity of a Nation?

None other than businesses and corporations invariably capture the benefits of the economic prosperity of a nation.

Why?

Because economic growth comes from more incomes in the hands of population, who in-turn armed with more income, demand more goods and services, which businesses come forward to produce and render.

If an investor wants to capture this growth, what shall he do?

Naturally, he must invest in the shares and stocks of these companies!

Will property and gold capture the full economic growth of a country?

Yes, to some extent indirectly, but corporations directly capture maximum growth, directly.

In conclusion, the right way to derive investment benefits out of the economic prosperity of a country, especially a great and stable nation like India, is through prudent long term investments directly in the shares of good listed companies after learning investing or indirectly through ‘Index Mutual funds’ or ‘Exchange Traded Funds (ETFs)’.

What is an Exchange Traded Fund?

An 'Exchange Traded Fund (ETF)' is special type of mutual fund. It closely mirrors popular stock indices like the 'BSE S&P Sensex' or 'NIFTY' or 'NIFTY Junior' and so on.

Every stock index comprises of select company shares in certain proportion or weigh  which is determined and disclosed by the index. The popular Sensex comprises of the top 30 companies by 'Market Capitalisation'. Once in a while the index is recast. A new company may replace an existing one.

Through an ETF instead of buying individual shares of a company you can buy the specific index itself. For example suppose you are interested in capturing the growth of the NIFTY, which constitutes the top 50 companies by market capitalisation of all the companies listed on the NSE, you have two options, as follows:

1. You can keep track of the index yourself, buy the individual shares in the same quantity as the index and making necessary adjustments as and needed, based on the actual changes in the composition of the index, which is a tedious and time consuming process.
2. Alternatively you can buy the ETF of the index you want to track. The drudgery is taken care of by the fund which created the ETF.

Here I present the various types of ETFs offered by Golaman Sachs in India:

Let us examine the composition of GS Nifty BeES.

The above picture depicts the composition of the GS Nifty BeES as on 1st August 2016.

 For the efforts taken to create and maintain the ETF, the sponsoring mutual fund charges a small annual maintenance fee, besides again reasonable purchase and redemption charges. The greatest advantage of an ETF is the low maintenance fees, usually less than 0.50% per annum. In contrast, mutual funds charge higher fees in the range of 1 to 2.25% per annum, besides the entry and exit loads.

The ETFs can be purchased just as you would purchase shares on the stock market. They are listed along side and among equity shares. This means it saves you the trouble of making an application form with the mutual fund for purchasing and redemption of units.

In conclusion, in my opinion ETFs are much better than mutual funds on account of ease of transaction, low charges as well as efficiency of long term wealth creation.

What will give me more profit after 5years? Investment in properties or in stock market or in mutual funds?

Your question has two major elements and the second major element another three sub options, as follows:

1. Investment Timeframe - Five years
2. Investment Options:

• Property
• Stock Market
• Mutual Funds

All value investors, including myself, do not consider property as an sensible investment option for the simple reasons, it is:

• Illiquid
• Return on investment by way of rent is unjustifiably low
• Capital Appreciation benefit is available as in shares and mutual funds but the quantum is more dependent on luck.

The investment options left are only stock markets and mutual funds, but before I address them let me take-up the investment period element.

An investment horizon of five years is very short. twenty years is minimum and about fifty years is ideal. Only when you invest for such long time, the law of ‘Miracle of Compounding’ will have the opportunity to work for you and make you really rich and wealthy.

Coming back to investment options of stock markets and mutual funds, both are good. Direct stock market investing requires special knowledge which you can acquire from the book, Intelligent Investor - The Investors' Bible and you may also kindly visit my blog,Value Investing.

As far as mutual funds are concerned, they are the best choice for those who do not wish to or do not have the time required to study stock market investment. One of the problems with mutual funds is that they charge a heavy fund management fee. There is yet another version of the mutual fund called an ‘index fund’ or ‘exchange traded fund’ which mirror popular stock market indices like the S&P BSE Sensex or NIFTY 50, where the charges are low and very reasonable.

Would Now (August 2016) be a Good Time to Invest in an Index Fund?

For Investing in an Exchange Traded Fund ( ETF ) or a mutual fund, all times are equally good.In case the market is exceptionally low or bearish, you can increase the quantum of investment can be increased.
From a Value Investing perspective, now, August 2016, the valuations are high. About an year back as well as a short time ago the BSE SENSEX was around 24000, which as per earnings of select stocks, the conditions were favorable.I reapet once again that there is no point in waiting for a good time to invest in ETFs and mutual funds. So please start immediately.