An ETF, or Exchange Traded Fund, are basically a type of mutual Funds which follows an indices and the same are listed and traded on exchanges like stocks.

ETFs are funds that track any market securities like Index, bonds, Golds and foreign instruments.

The difference between ETFs and Mutual funds are as follows,

One should understand how ETFs work before making any investment decisions. ETFs replicate the index which they track and they don’t outperform the underlying asset. ETFs don’t beat the market and whereas MFs funds differs in this.

Simply put, ETFs are basket of securities which mimic the Underlying benchmark and ETFs returns doesn’t exceed the benchmark index.

ETFs are passively managed funds where the portfolio adjustments are not required very often and makes its expense ratios lower.

These funds does not try to outperform the markets.

ETFs and Futures are not the same because Futures have the expiry and ETFs can be held as long as the investors wants.

The first ETF in India, “Nifty BEEs (Nifty Benchmark Exchange Traded Scheme) based on Nifty 50, was launched in January 2002.

The Dividends received from the stocks bought by the ETFs are reinvested in the fund itself.

To buy an ETF, you need a demat account while MFs doesn’t require bcz you are directly buying from the fund houses.

How does an ETFs mimic ?

Let’s take an example of an ETF say, KOTAKNIFTY ETF which has an underlying NIFTY Index.

Let’s compare. Nifty50 has 50 stocks. And KotakNIFTY portfolio also having same 50 nos of stocks. In the Index, Not all 50stocks having the same percentage of weightage.

See below Pie chart for the Nifty weightage in Stocks.

So the KOTAKNIFTY50 also have the portfolio with same percentage of stocks.

If you see the ETF movement in table, you will be more clear.

ETFs is almost following the NIFTY Trend in the past returns because it has the same portfolio as like Nifty.

Tracking Error:

Tracking error is the difference between an ETF portfolio’s returns and the underlying benchmark indices.

Sometimes, there will be a deviation due to the dividends received from the stocks and the deviation is reffered as tracking error and it is usually expressed in percentage.

Also, when there is change in Nifty weightage, the ETFs will have to do the right modification and there also it develops a deviations

Costs around ETFs

Like every other shares traded in the Exchanges, the brokerage applies to the ETFs also. STT and other usual costs of trading in stocks is applied to ETFs also.

You can calculate the ETF Brokerage here. 

Types of ETFs available in NSE

Any asset class that has a published index and is liquid enough to be traded daily can be made into an ETF. For Example , Stocks,Bonds, real estate, commodities, currencies, and multi-asset funds are all available in an ETF format.

Equity ETFs

Equity ETFs are instruments which based on indices and invest in securities in same proportion as the underlying index.

LIST of Underlying Indices in NSE:

Among the above underlying, the most common underlying indices are NIFTY50 AND  NIFTYBANK.

Please see the list of NIFTY 50ETFs.

Please see below table for the complete list of Equity ETFs in NSE.

List of Equity ETFs listed on NSE

Issuer Name	Name	Symbol	Underlying	Launch Date
Reliance Nippon Life Asset Management Limited	NIPPON INDIA ETF NIFTY BEES	NIFTYBEES	NIFTY 50 Index	28-Dec-01
ICICI Prudential AMC	ICICI SENSEX Prudential Exchange Traded Fund	ISENSEX	S&P BSE Sensex	10-Jan-03
Reliance Nippon Life Asset Management Limited	NIPPON INDIA ETF Junior BeES	JUNIORBEES	NIFTY Next 50	21-Feb-03
Reliance Nippon Life Asset Management Limited	NIPPON INDIA ETF Bank BeES	BANKBEES	NIFTY Bank	27-May-04
Reliance Nippon Life Asset Management Limited	NIPPON INDIA ETF PSU Bank BeES	PSUBNKBEES	NIFTY PSU BANK	25-Oct-07
Kotak AMC	Kotak PSU Bank ETF	KOTAKPSUBK	NIFTY PSU BANK	8-Nov-07
Quantum AMC	Quantum Index Fund - Growth	QNIFTY	NIFTY 50 Index	10-Jul-08
Kotak AMC	Kotak NIFTY ETF	KOTAKNIFTY	NIFTY 50 Index	2-Feb-10
Motilal Oswal AMC	MOSt Shares M50	M50	NIFTY 50 Index	28-Jul-10
Reliance Nippon Life Asset Management Limited	Reliance ETF Infra BeES	INFRABEES	NIFTY Infrastructure	29-Sep-10
Motilal Oswal AMC	MOSt Shares M100	M100	NIFTY Midcap 100	31-Jan-11
Religare AMC	Religare Invesco NIFTY ETF	RELGRNIFTY	NIFTY 50 Index	13-Jun-11
Birla Sun Life AMC	Birla Sun Life NIFTY ETF	BSLNIFTY	NIFTY 50 Index	21-Jul-11
ICICI Prudential AMC	ICICI Prudential NIFTY ETF	INIFTY	NIFTY 50 Index	20-Mar-13
Reliance Nippon Life Asset Management Limited	NIPPON INDIA ETF NIFTY 100	RELCNX100	NIFTY 100	22-Mar-13
ICICI Prudential AMC	ICICI Prudential CNX 100 ETF	ICNX100	NIFTY 100	20-Aug-13
Reliance Nippon Life Asset Management Limited	CPSE ETF	CPSEETF	NIFTY CPSE Index	28-Mar-14
Reliance Nippon Life Asset Management Limited	NIPPON INDIA ETF Consumption	RELCONS	NIFTY India Consumption	3-Apr-14
Reliance Nippon Life Asset Management Limited	NIPPON INDIA ETF Dividend Opportunities	RELDIVOPP	NIFTY Dividend Opportunities 50	15-Apr-14
Kotak AMC	Kotak Banking ETF	KOTAKBKETF	NIFTY Bank	4-Dec-14
SBI AMC	SBI ETF Banking	SETFBANK	NIFTY Bank	20-Mar-15
SBI AMC	SBI ETF NIFTY Junior	SETFNIFJR	NIFTY Next 50	20-Mar-15
Edelweiss AMC	Edelweiss Exchange Traded Scheme - NIFTY	NIFTYEES	NIFTY 50 Index	8-May-15
SBI AMC	SBI ETF NIFTY	SETFNIFTY	NIFTY 50 Index	23-Jul-15
UTI AMC	UTI NIFTY ETF	UTINIFTETF	NIFTY 50 Index	3-Sep-15
UTI AMC	UTI Sensex ETF	UTISENSETF	S&P BSE Sensex	3-Sep-15
ICICI Prudential AMC	BHARAT 22 ETF	BHARATIWIN	S&P BSE BHARAT 22 index	28-Nov-17

Source: NSE Website

GOLD ETFs

Gold ETFs are instruments which are based on gold prices and invest in gold bullion.

Please see below table for the complete list of Gold ETFs

List of Gold ETFs listed on NSE

Issuer	Name	Symbol
Axis Mutual Fund	Axis Gold ETF	AXISGOLD
Birla Sun Life Mutual Fund	Birla Sun Life Gold ETF	BSLGOLDETF
Invesco Mutual Fund	Invesco India Gold Exchange Traded Fund	IVZINGOLD
HDFC Mutual Fund	HDFC Gold Exchange Traded Fund	HDFCMFGETF
ICICI Prudential Mutual Fund	ICICI Prudential Gold Exchange Traded Fund	ICICIGOLD
IDBI AMC	IDBI Gold ETF	IDBIGOLD
Kotak Mutal Fund	Kotak Gold Exchange Traded Fund	KOTAKGOLD
Quantum Mutual Fund	Quantum Gold Fund (an ETF)	QGOLDHALF
SBI Mutual Fund	SBI Gold Exchange Traded Scheme	SETFGOLD
UTI Mutual Fund	UTI GOLD Exchange Traded Fund	GOLDSHARE
Reliance Nippon Life Asset Management Limited	Nippon India ETF Gold BeES	GOLDBEES

Source : NSE Website

Gold ETFs are subject to market risks impacting the price of gold.

Gold ETFs are ideal for investors who wish to invest in gold but do not want to invest in physical gold due to the storage hassles / doubt about purity of gold and are also looking to get tax benefits.

Other advantages are,

• ETFs are accepted as collateral in trading or loans.
• No making charges
• Exit loads – NIL
• No fear of theft
• No wealth tax

World Indices ETFs

Global Equity Exchange Traded Funds (ETFs) are simple investment products that allow the domestic investors to take an exposure to international indices.

As of now, 2 ETFs namely

• MOSt Shares NASDAQ 100 (N100) and
• Reliance ETF Hang Seng BeES (HangSeng)

Debt ETFs

Debt Exchange Traded Funds (ETFs) allows the investors to take an exposure to the fixed income securities. They invest the same proportion as the underlying index.

• LIC Nomura MF G-Sec Long Term ETF – Reg – Growth
• Reliance ETF Liquid BeES
• Reliance ETF Long Term Gilt

Check out the the latest info on ETFs  available in BSE & NSE in India

How to select a right ETF for you?

1.Category/type/Benchmark

Based on your risk profile, Select the type where you want to invest.

As we seen earlier, there are 4 types of ETFs available in India such as Equity based, debt based, gold and world indices based.

Let’s assume you are would like invest in Equity based Nifty50 ETF.

2. Higher Trading Volume

Investors should choose an ETF where its trading volume is high. Why? Because low trading volume will result in higher bid-ask spread, leading to more cost.

See below Volumes,

3.Low Tracking Error

To mimic the Index, we should choose an ETF with less tracking error or lesser alpha.

See below table for the comparision. Investor must pick the ETF with minimum tracking error.

4.Low Expense Ratio

As the ETFs are not active funds, Any ETFs which are lesser than 0.5% is good.

Conclusion

ETF is the combination of Stock and Mutual funds. It offers advantages like Low risk, diversified portfolio ,Low cost structure and Finally, EASY to Trade like stocks.

By using the above guidelines, I hope you understand about ETFs and select the right instrument for you.

Happy Investing.!

Check out the Index Funds and learn how it differentiates from ETF !!