Economy News

EXCHANGE-TRADED FUND (ETF)

Written by Talent KAS

Related Topic in KAS Prelims Syllabus:

Economy and Planning [Paper-II]: Stock Exchange and Share Market

Why in News?

  • Union government is expected to launch India’s first fixed income Exchange Traded Fund (ETF) comprising debt securities of about a dozen state-owned companies (PSUs) by mid-December 2019.

News in Detail

  • The debt ETF provides a new option to conservative investors to own securities of government-owned companies along with the facility of overnight liquidity as ETF units will be listed on exchanges.
  • The debt ETF can comprise corporate debt securities in the form of bonds, credit-linked note, debentures, and promissory notes as underlying instruments.
  • Large central public sector enterprises are expected to participate in the maiden debt ETF.
  • Department of Investment and Public Asset Management (DIPAM) has appointed Edelweiss Asset Management as the asset manager for the proposed debt ETF.
  • In the Union Budget 2018-19, the then Finance Minister had announced the plan of DIPAM to come out with a debt ETF, which will help government companies better plan their capital expenditure and borrowing needs.

What is an Exchange-Traded Fund (ETF)?

  • An ETF is a fund that comprises a group of stocks that are listed on an exchange and can be simply traded like any other listed security.
  • Typically, an ETF mirrors a particular index, which means the group of stocks in the ETF would be similar to those in the index that it is benchmarked to.
  • For example, an ETF mirroring the Sensex would have the same 30 stocks that the Sensex has.
  • ETFs are not only available for stocks, but can be created for any kind of asset or security that has an index or a liquid market for the underlying securities of the ETF.

Benefits

  • The biggest benefit of investing through ETFs is liquidity.
  • Since an ETF is publicly listed and traded on a stock exchange, liquidity is not an issue.
  • An investor can know the price of each unit of the ETF and take an informed decision.
  • The price of the ETF is based on the net asset value of the underlying stocks. The fund management fee of an ETF is much lower than that of a normal mutual fund scheme.
  • Thus, investors save on that aspect as well while getting the benefit of a professional fund manager.

Difference between ETF and Index Fund

  • An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500).
  • Index fund is also designed to mirror a particular index. But, there are some differences between an ETF and an index fund.
  • An index fund is just like any other mutual fund wherein the net asset value (NAV) of the fund is based on the closing price of the underlying securities.
  • In the case of an ETF, NAV is continuously linked to the current market price of the underlying stocks, which also makes it possible to buy or sell the ETF unit throughout the day just like an ordinary stock.
  • Since an ETF is traded like a stock, one needs a demat account to buy or sell an ETF.
  • An index fund can be bought directly from an asset management company without having a demat account.

[Source: The Hindu, Indian Express, PIB]

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Talent KAS

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