COMMERCE GURUKUL: EXCHANGE TRADED FUNDS

Exchange Traded Funds are a type of financial instrument whose unique advantages over mutual funds have caught the eyes of many investors.

13.1 What is an Exchange Traded Fund?
An Exchange Traded Fund (ETF) is a hybrid product that combines the features of an index fund. These funds are listed on the stock exchanges and their prices are linked to the underlying index. The authorized participants act as market makers for ETFs.
ETFs can be bought and sold like any other stock on an exchange. In other words, ETFs can be bought or sold any time during the market hours at prices that are expected to be closer to the NAV at the end of the day. Therefore, one can invest at real time prices as against the end of the day prices as is the case with open-ended schemes.
There is no paper work involved for investing in an ETF. These can be bought like any other stock by just placing an order with a broker.
An exchange-traded fund trades like a stock. Just like an index fund, an exchange traded funds represents a basket of stocks that reflect an index such as the Nifty, BSE, S&P 500 in global market. An exchange traded funds, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an exchange traded funds's price changes throughout the day, fluctuating with supply and demand. It is important to remember that while exchange traded funds attempt to replicate the return on indexes, there is no guarantee that they will do so exactly. It is not uncommon to see a 1% or more difference between the actual index's year-end return and that of an exchange traded funds.
By owning an exchange traded funds, investors get the diversification of an index fund plus the flexibility of a stock. Because Exchange Traded Funds trade like stocks, one can short sell them, buy them on margin and purchase as little as one share. Another advantage is that the expense ratios of most Exchange Traded Funds are lower than that of the average mutual fund. When buying and selling Exchange Traded Funds investors pay their broker the same commission that
they would pay on any regular trade.
A great reason to consider Exchange Traded Funds is that they simplify index and sector investing in a way that is easy to understand. If investors feel a turnaround is around the corner, they can go long (purchase). If, however, they think ominous clouds will be over the market for some time, they have the option of going short(sell). The combination of the instant diversification, low cost and the flexibility that Exchange Traded Funds offer makes these instruments one of the most useful innovations and attractive pieces of financial engineering to date.
They first came into existence in the USA in 1993. It took several years for their public interest. But once they did, the volumes took off with a vengeance. Over the years more than $ 120 billion (as on June 2002) is invested in about 230 ETFs of trading volumes on the American Stock Exchange are from ETFs. The most popular are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the Index, I SHARES based on MSCI indices and TRAHK (Tracks) based on the Hand. The average daily trading volume in QQQ is around 89 million shares.
The following Exchange Traded funds (ETFs) are being presently traded at National Stock Exchange of India:
v S&P Cnx Nifty UTI Notional Depository Receipts Scheme (Sunder)
v Liquid Benchmark Exchange Traded Scheme (Liquid BeES)
v Junior Nifty BeES
v Nifty BeES
v Bank BeES
ETFs can be bought/sold through trading terminals anywhere across the country. A comparative view of ETFs vis-à-vis other funds have been given in the following table: ETFs Vs. Open En

ded Funds Vs. Close Ended Funds