by Mirae Asset Knowledge Academy
01. Introduction to Exchange Traded Fund (ETF)
ETFs are types of Mutual Funds that aim to track the performance of a specific index such as
NIFTY 50, NIFTY Next 50, NIFTY Bank etc. These ETFs can be based on indices tracking various
asset classes like equity shares (NIFTY 50 ETF), bonds (10 year G-Sec ETF), Gold (Gold ETF),
Tri-party Repo (Liquid ETF) etc.
In an ETF, the weight of all securities mirrors the weight of the securities in the underlying
benchmark index. For example, if ABC Bank has a weight of 10.52% in NIFTY 50, a NIFTY 50 ETF
will also have ~10.52% of ABC Bank by weight in its portfolio.
Illustration :
Index Constituents & Weight Fully Replicated ETF
ABC (10%) ABC (10%)
DEF (9%) DEF (9%)
KIL (8%) KIL (8%)
XYZ (7%) XYZ (7%)
Cash Component (Residual)
Index Provider Asset Management Company (AMC)
ETFs are called passive funds because the fund manager does not try to outperform the benchmark
index but instead tries to mirror its performance. For example, a NIFTY 50 ETF seeks to generate
return which is similar to NIFTY 50 Total return index.
*by Mirae Asset Knowledge Academy
02. Advantages of an ETF
The Exchange Traded Funds (ETFs) are:
Easy to Transact (Can be bought or sold on exchange)
Transparent (Replicates the portfolio and return of stated index (subject to tracking error)
Frugal (Low cost)
ETFs are an investment medium which combine the features of mutual fund & stock investing.
On one hand, investors can buy an ETF to get underlying Index returns at low cost (low
expense ratio) and on the other hand they can trade in an ETF like a stock at live NAV, to
benefit from intra-day volatility, if desired.
Some of the features of investing through an ETF :
Liquidity Low Cost Transparency Performance
Trades on exchange Lower expense ratio Portfolio is NIFTY 50 ETFs have
like stocks than active equity disclosed on a outperformed 71%
throughout the day funds since active daily basis and 85% of large
fund management cap mutual funds in
is not required the previous 1 year
Priced close to Live Replicates the and 3 year period
NAV, hence can be return of the respectivey (as on
bought and sold No Exit Load underlying Index Dec 31, 2019)*
intra day at (subject to
current value tracking error)
*Source: ACE MF. ETF performance is compared against 28 large cap funds Regular plan (Growth).
As on Dec 31, 2019. Investors should read the offer document to know in details about the product. Past performance
may or may not sustain in future.
*by Mirae Asset Knowledge Academy
03. ETF v/s MF
Difference between an ETF and Mutual Fund
Exchange Traded Funds (ETFs) are a professionally managed investment instrument like Mutual Funds.
Both provide access to securities and asset classes depending on the desired risk return objective of the
fund. The key differences between ETFs and Active Mutual Funds are mentioned in the table below.
Parameter Exchange Traded Fund Active Mutual Funds
Trading Listed and traded on exchange just Open ended mutual funds are
like stocks not listed on exchange
Transaction Can be bought and sold at live Open ended mutual funds are
Price Nav (iNAV), hence investor can use bought and sold only at day
intra-day market movement closing NAV
Returns Aims to generate returns which are Aims to generate returns based on
Objective similar to the benchmark Index fund managers skill and view & aims
to outperform the benchmark Index
Replicates the portfolio of the Portfolio is created based on fund
Portfolio benchmark Index manager view, within the investment
objective of the fund
Lower cost since active management of Active management of portfolio etc.
the portfolio is not required leads to higher cost
Cost
Average expense ratio of Nifty 50 ETFs Average expense ratio of large
is 0.08%*1 funds is 2.2% (Regular)*2
Exit Load No Exit Load Can have Exit Load
*Source: ACE MF. *1 Average of 17 NIFTY 50 ETFs. *2 Average of 28 large cap funds Regular plan (Growth).
Behaviour of Plain vanilla ETFs and open ended mutual funds are explained in this note. As on Dec 31, 2019.
*by Mirae Asset Knowledge Academy
04. Why ETFs now?
With large cap funds finding it increasingly difficult to outperform benchmark indices like NIFTY 50,
ETF provides a low cost investment avenue to take exposure of various segments of the markets
including large caps. Through investment in ETFs, investors may create wealth along with comfort of
portfolio transparency and tradability like stock.
Returns
• NIFTY 50 ETFs have outperformed large cap mutual funds significantly in last 1 and 3 year period and
NIFTY Next 50 ETFs have outperformed large cap mutual funds significantly in last 5 and 7 year period
% of MF schemes outperformed by ETFs*
ETF Type v/s Fund category 1 year 3 years 5 Years 7 years
NIFTY 50 ETF Large Cap 71% 85% 74% 41%
NIFTY Next 50 ETF Large Cap 0% 22% 78% 78%
*based on 28 large cap funds. Source: ACE MF, as on Dec 31, 2019. For return comparison, average return of all ETFs in a
given category is considered. Compared against Regular Plan (Growth). Past performance may or may not sustain in future.
Outperformance:
• In the previous 3 year, NIFTY 50 ETFs have outperformed large cap MFs by an average of 2.7%
Outperformance by ETFs (%)*
ETF Type v/s Fund category 1 year 3 years 5 Years 7 years
NIFTY 50 ETF Large Cap 1.5% 2.7% 0.8% -0.3%
NIFTY Next 50 ETF Large Cap -10.4% -1.8% 1.0% 1.1%
*based on 28 large cap funds. Source: ACE MF, as on Dec 31, 2019. For return comparison, average return of all ETFs have
been compared with the average returns of MFs, in a given category, Compared against Regular Plan (Growth). Past
performance may or may not sustain in future.
Aims to act as wealth creator:
Since 2005, NIFTY 50 has given an average rolling return of 16.3% for an investment period of 5 years and
average rolling return of 17.2%, for an investment period of 3 years (Source: ACE MF, as on Dec 31, 2019)
Seeks low investment cost:
Average expense ratio of large cap funds is 2.2% (Regular Plan: Growth) as compared to the average
expense ratio of 0.08% for NIFTY 50 ETFs (As on Dec 31, 2019)
Transparency:
ETFs are based on public indices and disclose their holdings on a daily basis, enabling investors to
know what they are investing into on a regular basis.
*by Mirae Asset Knowledge Academy
05. How to trade in an ETF?
Transaction on Exchange Transaction on Exchange
As the name implies, Exchange Traded Funds
Investors can be bought and sold on stock exchanges,
(Buy/Sell just like stocks in any quantity)
just like stocks. For example a NIFTY 50 ETF (An
open ended scheme replicating/tracking Nifty
Cash ETF Units
50 Index) can be listed and traded on either or
both National Stock Exchange (NSE) and
Authorized Participants*
Bombay Stock Exchange (BSE).
Stock Exchange
(Quotes by other investors and market maker)
Authorized participants are assigned by the AMC to provide
continuous liquidity on the exchange around real time NAV. They
provide both buy and sell quotes like Banks in force market.
On the stock exchange, buy and sell trades for ETF units are usually carried out by
Existing or new investors
Authorized Participants (AP) who act as a market maker by providing both buy and sell quotes,
with some spread. Since AP provides these quote based on intra-day indicative Net Asset Value
(iNAV), the prices of ETF units remain close to their latest NAV throughout the day.
For example,
Lets say the closing NAV of a NIFTY 50 ETF on Feburary 26, 2019 was 108.50. On the next trading day,
if NIFTY 50 index moves up by 1% by 10:30 am, NIFTY 50 ETF will trade around in its iNAV (indicative
NAV) on exchange wich will also be higher by 1%, i.e 109.585 at 10:30 am on February 27, 2019.
The investor who wants to buy or sell ETF units from exchange (in multiples of one unit) can go to
their brokerage account and trade in ETF units just like stocks.
*by Mirae Asset Knowledge Academy
Transaction directly with AMC or
Transaction directly with AMC
Authorized Participant
Large Investors Large investors, who want to trade in multiples
(Buy/Sell in multiple of creation unit size) of creation unit size can also buy or sell ETF
units from Authorized Participants (AP) or
Asset Management Company (AMC), instead of
the stock exchange, if desired.
Cash for transaction in Multiple of ETF
Multiple of ETF creation creation units* A creation unit is a portfolio which mirrors the
unit size* composition of the underlying index and
represents “x” amount of ETF units. For
Mutual Fund example, the creation unit of NIFTY 50 ETF will
(Creates ETF basket/units to mirror an Index) consist of 50 companies with similar weight as
in NIFTY 50 Index and some minor cash
component. A creation unit size of a NIFTY 50
Creation unit is the minimum portfolio size which the ETF deploys ETF which has a NAV of 112 and consists of
in the stocks of underlying index to create a replaceable portfolio
50,000 ETF units will be Rs 56 lakh.
Transaction through AMC:
The investor can approach the AMC, which will provide the latest iNAV of the ETF unit and the current
creation unit size. In order to buy, investor will have to transfer the following amount to the AMC.
(iNAV of ETF Unit x number of ETF units in creation unit) + tax & transaction charges + Cash Buffer
Upon transfer of this amount, the AMC will implement the trade. The total amount charged will be
based on the price at which the trade is executed and will include the transaction charges like STT,
demat charge etc. The remaining amount will be returned to the investor and the ETF units will be
credited to the investor demat account. The sell order will be executed similarly, where ETF units will
be redeemed by the AMC and the amount will be credited to the investor bank account.
Transaction through Authorized Participant:
The Authorized Participant will provide the following information to the investor,
Indicative NAV: The latest intraday iNAV of the ETF unit.
Spread: The spread over iNAV which may be charged by the AP.
Final Execution price: Indicative NAV +/- Spread as agreed by investor
If agreed, AP will provide the above quotation on the stock exchange. The investor can now execute
the trade for the agreed price and amount on the exchange. The list of Authorized Participants of an
ETF is mentioned on the respective AMC's website.
*by Mirae Asset Knowledge Academy
06. Glossary
Authorized Participants (AP):
Authorized participants are essentially ETF liquidity creator on the exchange. They provide supply of ETF
units (both buy and sell side) on the exchange and keep the price of ETF units around its iNAV.
Creation Unit:
A creation unit is a portfolio which mirrors the composition of the underlying index and represents “x”
amount of ETF units. These are the smallest block of multiple ETF units that can be bought or sold from
the AMC and AP directly.
Index:
An index is a portfolio of asset like equity stock which represents a segment of the financial market
based on a defined methodology. The calculation of the index value comes from the prices of the
underlying holdings and its weight. Indices may have constituent weights based on full m-cap, free float
m-Cap, equal weighing or factors like volatility etc.
Indicative net asset Value (iNAV):
iNAV provides an intraday indicative value of an ETF based on the intra day market values of its
underlying constituents. It is used as a reference point for ETF trading
Passive Investment:
Passive investing broadly refers to a buy-and-hold portfolio strategy for long-term investment horizons,
with minimal trading in the market. Index investing is perhaps the most common form of passive
investing, whereby investors seek to replicate and hold a market index through investments in ETF or
Index Fund.
Disclaimer
All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered
Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the
Knowledge Center section available on the website of Mirae Asset Mutual Fund.
“The information contained in this document is compiled from third party and publically available sources and is included for general
information purposes only. There can be no assurance and guarantee on the yields. Views expressed by the Fund Manager cannot be
construed to be a decision to invest. The statements contained herein are based on current views and involve known and unknown risks and
uncertainties. Mirae Asset Investment Managers (India) Private Limited (the AMC) shall have no responsibility/liability whatsoever for the
accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees
accepts no liability for any loss or damage of any kind resulting out of the use of this document. The recipient(s) before acting on any
information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible
/ liable for any decision taken on the basis of information contained herein. Any reliance on the accuracy or use of such information shall be
done only after consultation to the financial consultant to understand the specific legal, tax or financial implications. Investors are advised to
read the Scheme Information Document of the respective scheme to know in detail about the product before investing.
