Exchange-traded funds (ETFs)

 

Exchange-Traded Funds (ETFs) are investment instruments that combine the diversification of mutual funds with the trading flexibility of stocks. They’ve become a popular choice for both retail and institutional investors worldwide.

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🧾 What is an ETF?

An ETF is a basket of securities (like stocks, bonds, or commodities) that tracks an index, sector, or asset class and is traded on a stock exchange just like a share.

🧠 Example:

• Nifty 50 ETF tracks the Nifty 50 index

• Gold ETF tracks the price of gold

• S&P 500 ETF tracks the US S&P 500 index

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⚙️ How ETFs Work

Feature	Description
Index Tracking	Most ETFs passively replicate a benchmark index
Units Listed on Exchange	You can buy/sell ETF units on NSE/BSE like stocks
NAV vs Market Price	ETFs have a NAV like mutual funds, but trade at market price
Market Maker Role	Maintains liquidity and keeps price close to NAV

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🔍 Types of ETFs

ETF Type	What It Invests In	Examples (India)
Index ETFs	Equity index (Nifty, Sensex, S&P 500)	Nippon India Nifty 50 ETF
Sector ETFs	Specific sectors (IT, Pharma, PSU, etc.)	ICICI Pru PSU Bank ETF
Bond/Fixed Income ETFs	Govt or corporate debt instruments	Bharat Bond ETF
Gold ETFs	Physical gold	SBI Gold ETF, Nippon Gold ETF
International ETFs	Global indices or foreign stocks	Motilal Oswal Nasdaq 100 ETF
Thematic ETFs	Based on themes like ESG, smart beta, etc.	ICICI Pru ESG ETF

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🧠 Why Invest in ETFs?

✅ Advantages

• Low expense ratios (as low as 0.05%)

• Real-time trading like stocks

• Diversification across entire index/sector

• Transparency: Daily disclosure of holdings

• Tax efficiency (capital gains tax on selling)

⚠️ Disadvantages

• Liquidity risk in low-volume ETFs

• Tracking error (NAV not perfectly tracking index)

• No SIP (Systematic Investment Plan) as in mutual funds

• Bid-ask spreads can impact cost of buying/selling

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🔢 How to Analyze an ETF

Criteria	What to Look For
Tracking Error	< 1% is ideal
Expense Ratio	Lower = better
Liquidity/Volume	High trading volume = lower bid-ask spread
AUM (Assets Under Mgmt)	Higher AUM = investor trust, better stability
Underlying Index	Should match your investment goal
Price-to-NAV premium/discount	Ideally close to 0

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📈 Popular ETFs in India (2024–25)

ETF Name	Category	Expense Ratio	AUM (₹ Cr)
Nippon India Nifty 50 ETF	Index (Nifty 50)	~0.05%	~₹20,000+
SBI ETF Sensex	Index (Sensex)	~0.07%	~₹10,000+
ICICI Prudential PSU Bank ETF	Sectoral	~0.15%	~₹5,000+
Bharat Bond ETF (April 2032)	Bond	~0.0005%	~₹20,000+
Motilal Oswal Nasdaq 100 ETF	International	~0.50%	~₹3,000+
SBI Gold ETF	Commodity	~0.60%	~₹4,000+

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🛒 How to Invest in ETFs (India)

1. Open a Demat + Trading account (Zerodha, Groww, Angel One, etc.)

2. Search for the ETF ticker (e.g., NIFTYBEES, SETFNIF50)

3. Place a buy order during market hours

4. Monitor performance via market price or NAV

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📉 ETF vs Mutual Fund: Key Differences

Feature	ETF	Mutual Fund (Direct Plan)
Trading	Real-time on exchange	Once per day at NAV
Expense Ratio	Lower (~0.05–0.5%)	Higher (~0.5–2.5%)
SIP Option	Not available directly	Available
Liquidity	Depends on exchange volume	AMC provides liquidity
Price Transparency	High (live tracking)	Moderate

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📌 Use-Cases of ETFs in a Portfolio

• Core holding (e.g., Nifty 50 ETF for passive growth)

• Tactical allocation (e.g., PSU bank or pharma ETFs during uptrend)

• Debt allocation (e.g., Bharat Bond for low-risk returns)

• International diversification (e.g., Nasdaq 100 ETF)

• Hedge against inflation (Gold ETFs)

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🔄 Bonus: Creating a Sample ETF Portfolio

Asset Class	ETF Example	Allocation
Indian Equity	Nippon Nifty 50 ETF	40%
Global Equity	Motilal Oswal Nasdaq 100 ETF	20%
Sector Play	ICICI PSU Bank ETF	10%
Gold	SBI Gold ETF	10%
Bonds	Bharat Bond ETF (2032)	20%