Sunday, April 15, 2012

>EXCHANGE TRADED FUNDS: Advantages and Disadvantages

We believe ETFs will receive major inflows as Economic conditions improve and money flows back in to the market. Some of the features are as follows:

 Tax Efficiency: Taxes may be one of most critical and yet overlooked factors in wealth creation over times as they can erode even the best fund’s returns. Because of their unique structure, ETFs, may serve as tax-efficient investment tool for shareholders who wish to defer capital gains until the point of sale.

 Transparency: ETFs report their holdings on daily basis, allowing their investors to regularly see their investments that underpin each ETF share.

 Flexibility: ETFs offer investment flexibility, allowing investors to buy and sell shares through out the day on an exchange. Investors can use ETF to implement advanced trading techniques such as purchasing on margin

 Any time NAV: In mutual funds whenever you put your investment/redemption you will get closing NAV of that particular day but in ETF you can buy it anytime during the trading hours.

 Low Asset Management Cost: As ETF are passive funds they don’t have to incur fund management charges, plus they are sold without intermediaries that keep total cost low.

 International Exposure: If you would like to invest in international markets, ETF is a better way as it gives you diversification benefit in that marked & you also know much about those countries active funds. Globally there are many ETFs which focus on Indian Markets – you can check India ETF List at Onemint.

 Dividends:ETFs may pay dividends in the same way as other companies. The dividends paid are typically based on the value of the dividends paid by the underlying stocks held by the ETF, less the operating expenses of the ETF. Investors are notified of the timing of dividend payments.

Disadvantages Of ETFs
Broker and commission costs: ETF are traded through brokers and hence every time brokerage has to be paid which becomes costly affair if regular trades are done.

Premiums and discounts: An ETF might trade at a discount to the underlying shares. This means that although the shares might be doing very well on the bourses, yet the ETF might be traded at less than the market value of these stocks.