What is an ETF and How is it Different from a Mutual Fund?

ETFs are one of the cheapest way to get broad exposure to an asset class

What is an ETF?

An ETF, or an Exchange Traded Fund, is a type of investment fund, which tracks an asset(s), a basket of stocks or an index. They’re called exchange-traded because they have shares that you can trade on the stock exchange throughout the day. They tend to be (but aren’t always) simplelow cost and passive.

  • Simple: Many ETFs have a simple proposition, tracking easily understood, widely known assets.
  • Low cost: Fee (also called expense ratio) varies but ETF fees tend to be lower than that of mutual funds. Annual fees for ETFs are usually lower than 0.5% of assets, while mutual fund management fees are often over 2% p.a.
  • Passive: They are more likely to passively track the value of an index or asset (like gold) than being actively managed.

What kinds of ETFs exist?

Several kinds, tracking a whole range of assets. The most common ones are:

  • Equity ETFs:  Track equity indices like the S&P 500
  • Bond ETFs:  Invest in a portfolio of bonds like US Government Bonds
  • Commodity ETFs: Track the price of a commodity like GOLD 
  • Sector ETFs: Track a portfolio build around a particular industry like semiconductors

How are ETFs different from Mutual Funds?

The key difference between an ETF and Mutual Fund is the management style. ETFs usually are passively managed, which means the underlying funds passively trade an index of stocks or other assets (like bonds or gold) based on preset rules. This is different from a mutual fund where the portfolio manager makes active investment decisions.

Because passive ETFs don’t need analysis or much management, they tend to have low costs and hence lower fees compared to mutual funds.

Another important difference is that you can trade an ETF any time of the day, while mutual funds can only be bought or sold at the end of the day. All investors that place an order to buy or sell mutual fund holdings on any particular day will get the same price for their trade.

ETFs are getting increasingly popular, as historical data suggests that on average passively managed index funds have been outperforming actively managed funds.

Why do fees matter?

Paying a higher fee can quickly add up, especially if the fund is not outperforming as much as the extra fee it is charging compared to a benchmark ETF. As an example, If you paid 0.30% fees per year rather than 1.50% p.a., after 5 years you will be 6% better off. That is more than 3 years’ worth of SPX dividends. Sort of an obvious choice, we say. No wonder passive ETFs are surging in popularity. 

In fact, more money is now managed in passive rather than active US equity funds. No one is telling you yet that agar Mutual funds sahee hai, toh ETFs aur bhi sahee hai (sure, mutual funds are good but ETFs are even better!!).

How can you invest in low-fee global ETFs like the S&P 500 from India? 

You can now invest in ETFs listed in the US through your Winvesta account. We currently offer over 70 ETFs on our platform, carefully selected to give you a wide exposure to the most common investing strategies or specific themes/sectors. 

Some of the ETFs you can trade FREE are:

  • S&P 500 ETF Trust
  • U.S. Total Stock Market Index Vanguard
  • Gold Shares SPDR
  • PowerShares QQQ
  • Core US Aggregate Bond iShares
  • US Total Bond Market Index ETF Vanguard
  • Value ETF Vanguard
  • Russell 1000 Growth ETF iShares

Besides these, there are many other ETFs that you can access on our platform to build your global investment portfolio.

 

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