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note on ‘Exchange Traded Funds’

Exchange Traded Funds

Meaning: Exchange Traded Funds (ETFs) were introduced in US in 1993 and came to India around 2001 Exchange-Traded Funds (ETFs) are mutual fund schemes that are listed and traded on exchanges like any other stocks. An Exchange Traded Fund (ETF) is a hybrid product that combines the features of an index fund. ETFs invest in a basket of stocks and try to replicate a stock market index such as the S&P CNX Nifty or BSE Sensex.
Advantage:
1. By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy margin and purchase as little as one share.
2. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. They have very low operating and transaction costs, since there are no loads required to purchase ETFs.
3. There is no paper work involved for investing in an ETF. These can be bought like any other stock by j placing an order with a broker.
4. A great reason to consider Exchange Traded Funds is that they simplify index and sector investing in a way that is easy to understand. If investors feel a turnaround is around the corner, they can go long, If, however, they think ominous clouds will be over the market for some time, they have the option of going short.

Exchange Traded Funds

5. The combination of the instant diversification, low cost and the flexibility that Exchange Traded Funds offer makes these instruments one of the most useful innovations and attractive pieces of financial engineering to date. Indian Scenario: The following Exchange Traded Funds (ETFs) are being presently traded at National Stock Exchange of India:
S&P CNX Nifty UTI Notional Depository Receipts Scheme (Sunder)
Liquid Benchmark Exchange Traded Scheme (Liquid BeES)
Junior Nifty BeES
Nifty BeES
Bank BeES
Some other important features of ETF are as follows:
1. It gives an investor the benefit of investing in a commodity without physically purchasing the commodity like gold, silver, sugar etc.
2. It is launched by an asset management company or other entity.
3. The investor does not need to physically store the commodity or bear the costs of upkeep which is part of the administrative costs of the fund.
History :They first came into existence in the USA in 1993. It took several years for their public interest. But once they did, the volumes took off with a vengeance. Over the years more than $ 120 billion (as on June 2002) is invested in about 230 ETFs on the American Stock Exchange .The most popular are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the Index, ISFLARES based on MSCI indices and TRAHK (Tracks) based on the Hand. The average daily trading volume in QQQ is around 89 million shares.

Exchange Traded Funds

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Exchange Traded Funds

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