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ETF vs. Mutual Funds

Off late, we have come across forum discussions on the exchange-traded funds (ETFs). ETFs are deemed as being one of the best channels for investment. While ETFs seem like mutual funds due to their pooling together of the investor’s money towards purchasing a portfolio of bonds and stocks that are diverse.

Not much difference exists between ETFs and mutual funds. A primary difference is the fact that one may purchase a share of ETF through a broker, similar to like stocks, without a fund manager who sells mutual funds. Mutual Funds are traded only at the end of the trading day at the net asset value (NAV) price, whereas ETFs are traded throughout the trading day just like stocks.

Most often, exchange traded funds need to be managed just like index funds. This means that managers do not choose the investments that will be held. Rather, these funds function as a category of investments, whether a mutual fund is chosen or an ETF is decided by the buyer’s convenience. When he/she already has a broker, it is simple to buy an ETF. In the absence of a brokerage account, the better option is to go for a mutual fund.

What is ETF?

An Exchange Traded Fund is an instrument that is traded on the stock exchange. The assets under an ETF are commodities, stocks etc. These assets are traded for an amount similar to the original NAV of the asset, through the trade day. ETFs advantages:

  • As an investor, you may sell short or buy on the margin. You may also buy just one share, since there are no minimum investment criteria.

  • There is a commission received by the broker when he/she purchases or sells ETFs. This is the same as that given for a regular deal.

  • ETF is similar to a mutual fund since it can be purchased and sold at daily variable costs.

Types of ETFs

Equity Funds

An ETF tracks equity indexes. While certain index ETFs mimic an index completely, others utilise representative sampling, which is different in that it uses futures, options and contract swaps.

Commodity Funds

Investment in commodity ETFs can happen when you have understood that you’re interest in commodities. Traditionally, commodities’ price correlation with equities is minor.

Fixed Income Funds

Experts mostly advise that you invest a part of your portfolio in fixed-income securities such as bonds and bond ETFs. This is because bonds tend to reduce a portfolio's volatility, while also providing an additional stream of income.

Real Estate Funds

Investors seeking little adventure should go for real estate investment trust ETFs. A major attraction in these funds is that they have to pay out 90% of their taxable income to shareholders.

Specialty Funds

With the popularity of ETF rising, various funds emerged to meet every conceivable investment strategy, similar to mutual funds.

  • Inverse funds – Make profit when a particular index does poorly, and
  • Leveraged funds - Double or triple the returns of a particular index by using leverage, as the name implies.

Currency Funds

While volatility is rising in world currencies and the U.S. dollar's function as reserve currency is receding, investors seeking protection on the worth of their U.S.-denominated investments will require options that give protection against the falling dollar.

Benefits of Investing in ETF

Tax Benefits

An advantage that an ETF has over mutual funds is with regards to tax. ETFs have displayed higher tax-efficiency because of how they are structured and how they are classified under the IRS. Also, one may realize capital gains taxes on an ETF only when the complete investment is on sale, compared to the capital taxes that go with a mutual fund when the fund assets are sold.

Cost-Effectiveness

When it comes to exposure to a specific sector, an ETF is a highly cost-effective means for generating a portfolio. Investment costs for ETFs are lower than the investment cost of most mutual fund portfolios.

Flexibility

ETFs are dealt on the stock exchange, therefore they can be purchased and sold while the exchange is working. Flexibility in ETFs comes from the fact that most ETFs track indices in particular segments of the market. Transferability of ETFs

While mutual funds are rated once daily at day’s end, the ETFs can be purchased and sold in trading hours for all types of transactions related to stocks. One may go for market orders, short sales etc. for ETFs. One may also make a margin purchase on ETFs.

How to Choose Best ETFS in India

Consider these to invest in best Indian ETFs.

  • Look at the Liquidity

  • Know the Expense Ratio

  • Check for Tracking Error

Difference Between an ETF and Mutual Fund

Mutual FundsExchange Traded Fund
Traded at the closing net asset value.Traded during the course of a trading day and its value may change during this time.
Carry varying operating expenses.Lower operating expenses.
Have minimum specified expense.No minimum investment stated for Exchange Traded Funds.
Carry more tax liabilities than ETFs.Gives tax benefits to you due to the manner of its creation and redemption.
Shares can be purchased directly from the funds at the NAV price only, fixed during the trading day.Can be purchased and sold on the stock exchange, at the prevailing market price.
Transaction costs are zero when mutual fund shares are purchased or sold.Additional cost is involved when trading ETFs -bid-ask spread.
Lower liquidity compared to Exchange Traded Funds.Have higher liquidity as they are not connected to the daily trading volume. Here liquidity is connected to the stock liquidity in the index.

Best ETFs to Invest in 2018 India

Top & Best Index ETFS

Fund Name1M Return(%)#3M Return(%)#1Y Return (% p.a.)#3Y Return (% p.a.)#5Y Return (% p.a.)#Expense Ratio (%)*AUM (CR)*
Reliance ETF Nifty BeES2.694.8321.969.0914.340.49877
ICICI Prudential Nifty iWIN ETF3.345.4821.102.82 -0.051008
Motilal Oswal MOSt Shares M50 ETF.-2.474.4821.266.64 -1.50 21 -
ICICI Prudential Sensex iWIN ETF2.775.8814.5012.6614.420.0825.82
Motilal Oswal MOSt Shares Midcap 100 ETF.2.439.5442.9121.14 -1.5025.82
Reliance ETF Junior BeES.-1.475.3534.1116.7022.141.00130

Top & Best Gold ETFS

Fund Name1M Return(%)#3M Return(%)#1Y Return (% p.a.)#3Y Return (% p.a.)#5Y Return (% p.a.)#Expense Ratio (%)*AUM (CR)*
Reliance ETF Gold BeES-1.42-1.66-2.671.06-1.101.00 2,706
Birla Sun Life gold ETF-2.53-4.22-3.570.19-1.210.9272
SBI Gold ETF-1.57-2.25-4.320.25-1.571.07813
UTI Gold ETF0.86-2.09-4.070.60-1.201.07457

Top & Best Sector ETFS

Fund Name1M Return(%)#3M Return(%)#1Y Return (% p.a.)#3Y Return (% p.a.)#5Y Return (% p.a.)#Expense Ratio (%)*AUM (CR)*
Reliance ETF Bank BeES2.677.6537.4714.2718.900.482,706
SBI ETF Nifty Bank Fund4.778.1138.60 - - -521
CPSE ETF-3.311.3146.743.28 -0.067,493
Reliance ETF Dividend Opportunities1.58.3.9234.547.88 -0.1017
Reliance ETF Consumption3.816.1220.6915.15 -0.0917
Reliance Infra BeES-3.034.1523.10-0.478.210.9918
Kotak PSU Bank ETF-3.092.0759.87-5.971.840.203,277

Top & Best Bond ETFS

Fund Name1M Return(%)#3M Return(%)#1Y Return (% p.a.)#3Y Return (% p.a.)#5Y Return (% p.a.)#Expense Ratio (%)*AUM (CR)*
Reliance ETF Liquid BeES0.381.185.426.22 6.600.561,426
SBI ETF 10 year Gilt1.552.49 - - - -2
LIC Nomura MF G-Sec Long Term ETF1.542.98 11.44 - -0.2577

Top & Best Currency ETFS

Fund Name1M Return(%)#3M Return(%)#1Y Return (% p.a.)#3Y Return (% p.a.)#5Y Return (% p.a.)#Expense Ratio (%)*AUM (CR)*
Wisdom Tree Indian Rupee Strategy Fund - - - - -0.4558.72
Market Vectors- Indian Rupee/USD ETN-0.44 --3.00 --0.240.558.38

Top & Best Global Index ETFS

Fund Name1M Return(%)#3M Return(%)#1Y Return (% p.a.)#3Y Return (% p.a.)#5Y Return (% p.a.)#Expense Ratio (%)*AUM (CR)*
Reliance ETF Hang Seng BeES 6.17 2.7812.2010.9511.291.006
MOSt Shares NASDAQ 100 5.22-5.6134.4323.9823.111.5071

FAQs On Etf Vs Mutual Funds

Is ETF better than a mutual fund?

ETFs offer better tax efficiency compared to mutual funds: This means that while ETFs and mutual funds both are treated similarly by the IRS where investors pay capital gains taxes and taxes on the dividend income.

ETFs fees is lower: ETF expense ratios are generally less than mutual funds

What are the Advantage of ETFs over mutual funds?

The following are the advantages of ETFs over mutual funds:

  • Tax-Friendly Investing
  • No Investment Minimums
  • Lower Cost Alternative
  • More Trading Control

Why buy an ETF?

  • ETFs are basically index funds but they trade like stocks.
  • ETFs less in taxes for shareholders.
  • They trade like stocks.

DO ETFs have more tax efficiency compared to mutual funds?

Yes; ETFs have transparency and tax efficiency.

How transparent are ETFs?

ETFs offer complete transparency into their holdings compared to mutual funds.

Tax Efficiency

When mutual funds or ETFs carry securities with value appreciation, that are sold, then capital gain is created. When funds gather capital gains, they must pay them out to shareholders at year’s end.

Are ETF a good investment?

Exchange-traded funds are great investment instruments for small and large investors alike. Such funds, can be similar to mutual funds.

Do ETFs pay dividends?

Exchange-traded funds (ETFs) pay out dividends every quarter by holding all of the dividends paid by underlying stocks.

Do ETFS automatically reinvest dividends?

Reinvestment into dividends ensures that you earn from them in an excellent way to raise your portfolio without signing your own corpus.

Do ETFS have to distribute capital gains?

Mostly, ETFs are less at risk from capital gains than mutual funds.

Do vanguard ETFS pay dividends?

Yes, most often Vanguard exchange-traded funds pay out dividends on a regular basis, typically once a quarter or year.

Do vanguard ETFS reinvest dividends?

They reinvest along no fee program that allows reinvestment of dividend and distributions from various:

  • Stocks
  • Closed-end mutual funds.
  • Exchange-traded funds etc.

How are ETF fees paid?

A management fee for investment in exchange-traded funds and mutual funds are subtracted by the ETF, and re-adjustments happen towards the net asset value on an everyday basis.

Do ETFS make money?

Yes; If you own a stock ETF that focuses on high-dividend stocks, you are hoping to make money from a combination of capital gains and dividends paid out by those same stocks.

Is an ETF a mutual fund?

Exchange-traded funds are same as mutual funds since they both put together securities that are offered to investors for diversified portfolios. Anything from 100 to 3,000 securities can make up a fund.

Are ETFS safe?

The first Exchange Traded Fund was initiated around 25 years ago in early 1993. Based upon the S&P 500, this listing tracked the world’s most recognised equity indices.

What is the advantage of an ETF?

Mutual funds have many advantages:

  • Diversification

  • Lower Fees Compared to Managed Funds

  • Trades Like a Stock

  • Dividends Reinvested Immediately

  • Capital Gains Tax Exposure Limited

  • Lower Discount or Premium in Price

Why you should invest in ETF?

ETFs have displayed higher accessibility towards smaller investors since they allow for the purchase of individual shares, whereas most mutual funds come with minimum investments

What are the tax advantages of ETFS?

ETF has a tax advantage over a mutual fund. They are more tax-efficient because of how they are constructed.

Do you pay taxes on ETF?

For legal and tax purposes, mutual funds and ETFs have similar structures. This means, that similar rules are applicable on both. An investor has to pay tax on dividends and capital gains distribution.

How ETFS are taxed?

ETFs have highly favourable tax treatments compared to mutual funds. Mutual funds mean the creation and redemption of shares with non-sales transactions. As product, they do not create taxable events.

Which has more tax efficiency, an ETF or a mutual fund?

ETFs are more tax efficient since they create lesser taxable events compared to most mutual funds. A majority of ETFs sell only holdings.

Does Fidelity have ETFS?

Free commission offer is applicable to online Fidelity ETFs purchase and operates only on selective iShares.

Differentiate between the index fund and ETF?

Both of them are low-cost fund investments into a large index. Leaving very little variety between them. The primary differences are that an ETF can be traded throughout the day like a stock, whereas a mutual fund can only be bought or sold at the end of the day's Net Asset Value (NAV).

Are ETF and index fund the same?

ETFs – This comprises of stocks that make for a specific index such as Sensex or Nifty. In this, each stock has same weightage as on the index.

Index funds - The portfolio of index funds is a replica of an exchange index. Considering that index funds have almost zero liquidity in their own, they mostly have a better percentage of assets in cash and liquid securities than ETFs.

Differentiate between ETF and mutual fund?

An ETFs is an index tracker, which means that they try matching the returns and price movements from the index. While Mutual funds can track indexes, they are actively managed.

What is an example of an ETF?

An example is iShares. This is Barclay's brand of ETFs. In the year 2009 there were around 350 iShares at $300 billion in management.

How does an ETF make money?

ETFs are typically a basket of stocks that are based on an index. For instance, FXI is comprised of stock in the 25 largest companies in China. There are also industry sector and commodity ETFs.

What is an ETF vs index fund?

  • ETFs are quite flexible and convenient compared to index funds.
  • ETF can be traded more conveniently compared to index funds and normal mutual funds.
  • An investor can purchase ETFs in small sizes and lesser hassles compared to index funds.

How do I buy an ETF?

  1. You already have an account with an online broker where you can buy and sell securities.

  2. Go for a low-cost index fund is an easy way to get a big slice of the market with little effort.

  3. When investing, you order an ETF using its ticker symbol.

  4. You just bought your first ETF.

Are Vanguard ETFS safe

Vanguard exchange-traded funds concentrate on the bond market, and are good options for investors seeking safe investments. Being a bond fund, it has less risk than funds exposed to the stock market

Are ETFS riskier than mutual funds?

In the past 2 decades, ETFs have evolved to become a very popular option for those seeking a cost-effective short-and long-term investment option.

Do ETFS have fees?

In case of ETFs and mutual funds, fees are subtracted by the ETF or fund company. Investor statements never see any direct management fees.

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