ETFs are created like mutual funds but they trade like stocks and therein lies their special characteristics. In essence, ETFs trade like stocks and therefore offer a degree of flexibility unavailable with traditional mutual funds. Specifically, investors can trade ETFs throughout the trading day as in stocks. In comparison, in a traditional mutual fund, investors can purchase units only at the fund's NAV, which is published at the end of each trading day. In fact, investors cannot purchase ETFs at the closing NAV. This difference gives rise to an important advantage of ETFs over traditional funds: ETFs are immediately tradable and consequently, the risk of price differential between the time of investment and time of trade is substantially less in the case of ETFs.
ETFs are cheaper than traditional mutual funds and index funds in terms of fees. However, while investing in an ETF, an investor pays a commission to the broker. The tracking error of ETFs is generally lower than traditional index funds due to the "in-kind" creation / redemption facility and the low expense ratio. This "in-kind" creation / redemption facility ensures that long-term investors do not suffer at the cost of short-term investor activity.
ETFs can be bought / sold through trading terminals anywhere across the country. Table No. 1 presents a comparative view ETFs vis-à-vis other funds.
ETFs are created like mutual funds but they trade like stocks and therein lies their special characteristics. In essence, ETFs trade like stocks and therefore offer a degree of flexibility unavailable with traditional mutual funds. Specifically, investors can trade ETFs throughout the trading day as in stocks. In comparison, in a traditional mutual fund, investors can purchase units only at the fund's NAV, which is published at the end of each trading day. In fact, investors cannot purchase ETFs at the closing NAV. This difference gives rise to an important advantage of ETFs over traditional funds: ETFs are immediately tradable and consequently, the risk of price differential between the time of investment and time of trade is substantially less in the case of ETFs.
ETFs are cheaper than traditional mutual funds and index funds in terms of fees. However, while investing in an ETF, an investor pays a commission to the broker. The tracking error of ETFs is generally lower than traditional index funds due to the "in-kind" creation / redemption facility and the low expense ratio. This "in-kind" creation / redemption facility ensures that long-term investors do not suffer at the cost of short-term investor activity.
ETFs can be bought / sold through trading terminals anywhere across the country. Table No. 1 presents a comparative view ETFs vis-à-vis other funds.
ETFs Vs. Open Ended Funds Vs. Close Ended Funds
Parameter
Open Ended Fund
Closed Ended Fund
Exchange Traded Fund
Fund Size
Flexible
Fixed
Flexible
NAV
Daily
Daily
Real Time
Liquidity Provider
Fund itself
Stock Market
Stock Market / Fund itself
Sale Price
At NAV plus load, if any
Significant Premium / Discount to NAV
Very close to actual NAV of Scheme
Availability
Fund itself
Through Exchange where listed
Through Exchange where listed / Fund itself.
Portfolio Disclosure
Monthly
Monthly
Daily/Real-time
Uses
Equitising cash
-
Equitising Cash, Hedging, Arbitrage
Intra-Day Trading
Not possible
Expensive
Possible at low cost