Exchange Traded Funds

Exchange Traded Funds

21 Jun 2018

Exchange Traded Funds (ETFs) are just what their name implies: a basket of securities that are traded, like individual stocks, on an exchange. Unlike regular open-ended mutual funds, ETFs can be bought and sold throughout the trading day like any stock.

Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money.

An ETF invests in stocks that comprise an index. The proportion in which it will allocate money may be the same as individual stocks' weight in the index or it may differ. For example, a Nifty ETF will invest in 50 stocks comprising the Nifty, most likely in accordance with the weight of individual stocks in the index.

Let us understand how ETF’s can be beneficial for your portfolio and how these are helpful in protecting your investments, particularly in negative market scenarios.

ETFs can be beneficial for your portfolio

If you are looking to diversify your investments, hedge against your risk, or gain exposure to a certain industry or market, then ETFs can be the perfect asset to include in your portfolio. Investors who take advantage of ETFs and include them as a part of their investing strategy reap many of these benefits. Here are some great reasons why:

  • Single Transactions: ETFs act like indexes and can follow certain market sectors. However, unlike an index, you can purchase an ETF with one easy, single transaction. Basically, you are purchasing a mini portfolio, not a basket of stocks, like you do with an index. This makes life easier when targeting a certain price. You also get filled on your complete order as opposed to a basket where you are chasing each individual stock, which is a lot more difficult.
  • Cost Effectiveness: Since there is only one transaction per trade, commissions are usually lower on an ETF as opposed to that of an index, which requires a basket of stocks and multiple trades. Also, there are no load fees, and managing fees tend to be lower for ETFs as opposed to regular mutual funds as well.
  • Flexibility: Speaking of flexibility, like equity, ETFs trade throughout market hours. ETFs can be sold short or on margin, and prices are continuously updated during the trading day. In other words, ETFs trade just like equities on the stock market.
  • Passive Management: ETFs are meant to follow a particular index or benchmark, but are not expected to outperform it (although this can also happen on occasions). Therefore, only minor adjustments are needed for the ETF, as opposed to an aggressively managed fund, which is specifically looking for a higher return than its underlying asset. This, in turn, lowers risk and management fees for ETFs as well.
  • Immediate Dividends: With most ETFs (open-ended), dividends are immediately reinvested back into the fund. In the case of traditional funds, the time frames may vary.
  • Simplicity: ETFs are simple in structure and are relatively easy to understand, with the exception of intricate funds such as leveraged and inverse ETFs. So, if you are looking to invest in a certain industry or want to emulate the ROI on a particular index or underlying asset, you are only a trade away from getting started with ETFs.

How to protect your investments and rebalance your portfolio with ETF Strategies?

As per the experts, markets have improved since the beginning of the year but they still fluctuate and remain unpredictable. Investors are weary as there is a sense of uncertainty among them. It is important for investors to protect their portfolios during the time when markets are down. One of the most popular emerging options during such times for the investors is ETFs (Exchange Traded Funds). Following are the reasons for selling your ETFs during a down market:

  • Risk Tolerance - It is time to sell your ETFs if you feel that you cannot take further risks or think you have had enough of losses. This benefits you to save your remaining capital by selling your ETFs if the market conditions have already made a dent on your capital.
  • Stop Orders – This effective tool has similar stop techniques as used in stocks and helps you to protect your portfolio. The benefit of Stop Orders is to minimize losses by closing out a position at a preset amount.
  • Get Cash – If you are in need of immediate money, you can sell ETFs during a down market. By following this approach, you get cash to meet your requirements and keep some gains.
  • Portfolio Rebalancing – You can go for a balancing act if there is a rapid drop in the markets and your ETFs have run up in value. This will eventually be beneficial to you as you can retain your ETFs to diversify and protect your profits.

With ETFs, an investor can reposition, identify and reinvest in sectors that are stronger at different points. ETFs have in them additional ways to protect the investment from a down market.

Founded in 2005, Abans Group has grown from being a trading house to a dynamic and diversified business group. We provide expertise in Broking Services, Merchant Banking, Non-Banking Financial Dealings, Gold Refining, Realty and Infrastructure. In a nut shell Abans Group is a comprehensive Financial Services and Solution Provider, which aims to provide an end-to-end financial solution to all its clients.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.