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