Hi
How to buy an exchange traded index fund? I have an icicidirect account. Is it like buying the blue chip stocks? I read that it can be traded like a share. If so, can we buy during every dip in sensex/nifty and beat the index itself (by buying more during crashes). I want to know more about it.
Dear Alchemist/members
thanks for your nice reply.
My real question is:
Say I buy 1 unit of nifty at 5000.
then market crashes, I buy 2 units at 4000
Again when nifty recovers to 5000, i have 3 units at an average of 4500. I gain 10% whereas the nifty has not moved at all! Am I right?
If so, I would like to make it the major part of my portfolio, and buy incrementally during fall, and fixed amount monthly during rise.
Your answer is much anticipated.
Anyone with experience in ET index fund?
Dear Alchemist/members
thanks for your nice reply.
My real question is:
Say I buy 1 unit of nifty at 5000.
then market crashes, I buy 2 units at 4000
Again when nifty recovers to 5000, i have 3 units at an average of 4500. I gain 10% whereas the nifty has not moved at all! Am I right?
If so, I would like to make it the major part of my portfolio, and buy incrementally during fall, and fixed amount monthly during rise.
Your answer is much anticipated.
Anyone with experience in ET index fund?
Yes it is possible.
As I said, it is just like a stock. Its value depends on the corresponding index.
You must keep two things in mind.
First, the returns of the Nifty ETF may not exactly be that of the Nifty. Expenses of the fund will reduce your annual returns by 1%.
(Current expense ratio of the fund is 0.8%).
Also when the constituents of Nifty change, the fund has to change its portfolio. During this churning, the fund's return may be slightly different from the Nifty. (both positive and negative divergence from Nifty are possible).
The difference in returns is marginal and most probably will be less than 1.5% per year.
Second, just like stocks, you will be paying brokerage and taxes for trading ETF's. If you trade too much or try to make profits from each minor move, your brokerage and taxes will eat away your profits.
If you are able to time the market well, then definitely you can get better returns than the index itself.
Being an ETF, you also are assured that you are investing in the index and thus can expect growth in the long term.
Because, in general, people keeps track of Nifty or Sensex, and not of individual stocks. So, it is better to invest in Index based ETF as one has kept track of the NSE or BSE, but the word of caution is already out as told by Alchemist. So, invest but cautiously.
I think it is right time to enter ETF (I have already purchased Nifty Benchmark ETF).
The reasons are:
1.It tracks index (blue chips)
2.There is no need to bother about individual company
3.It is like a mutual fund (fund manager does whatever is needed to track the index)(It is difficult to beat the index every time by mutual funds)
4.If you think that Nifty will be around 6000 at a future date (e.g., say 2010), every fall below is an opportunity to buy incrementally.
Friends, don't you think at least at some point of time Nifty will be 6000 (I believe it will be a lot more than that!)
5.In my opinion, it should be major part of my portfolio (instead of buying large caps often, we can buy this) with rest comprising quality midcaps and small caps
I request the opinion of boarders and Alchemist of course! (to confirm my views!)
Last edited by katta : 26th January 2008 at 12:58 PM.
When buying in Index funds, do note a few things.
- Many Index funds in India have large tracking errors for whatever reasons.
- Also some Index funds have high operating costs - comparable to manage funds.
There is no reason for an unmanaged fund to have operating costs comparable to
managed funds.
Hence buy an index fund which has the least tracking error & lowest cost of operation.
Overall, when I had done an analysis a year back, the UTI Nifty Index fund had the lowest
tracking error & low operating costs - hence that was what I purchased.
Note that the UTI Nifty Index fund is not an ETF - it's regular Mutual fund.
Also there is no entry load. No Exit load also if you hold it for a certain period of
time (forgot what's the period). This is one advantage over an ETF where you pay
broker's commision for both buying & selling.
I am interested in trading an ETF on the SENSEX. To the best of my knowledge, there are two such ETFs, SPIcE (from ICICI Prudential), and the Kotak SENSEX ETF. Are there others? If not, would anyone know the current expense ratios of the two I mentioned? Are there any other factors that might make one of these 'better' to trade than the other?
Yes, the liquidity of an ETF is similar to that of the securities comprising it.
I'm sorry but I disagree. The little time I spent watching NIFTYBEES on the trading screen, there didn't appear to be the liquidity that is found in the majority of NIFTY 50 stocks. There is a big gap between the bid and ask prices (relative to NIFTY 50 stocks).
There are even short intervals when the NIFTY 50 is moving one way and the ETF the other!
Don't take my word for it; check it out yourselves. As a matter of fact, I had posted on this topic quite a while ago here.
Of course, in the long term, the ETF will perform as does the underlying.
I am interested in trading an ETF on the SENSEX. To the best of my knowledge, there are two such ETFs, SPIcE (from ICICI Prudential), and the Kotak SENSEX ETF. Are there others? If not, would anyone know the current expense ratios of the two I mentioned? Are there any other factors that might make one of these 'better' to trade than the other?
Thanks.
Varun
If you want to "trade" in ETF's, then you shouldn't be looking at the expense ratio.
Instead you should be looking at factors like liquidity and impact cost.
Compared to stocks, ETF's are illiquid and also have very high impact cost.
The last time anyone traded SPIcE was nearly a month back on 17th September 2008.
Hi
Coming back after a long time, I kept on accumulating NIFTY at regular intervals with average cost of about 330. Last week sold about 15% at 430. Now on up move, would sell some more and on down move, would buy more as I feel it is now rightly priced.
For the wealthy, index funds have an image problem. They are considered the economy cars of the investing world: they’ll get you there but not in style and you’re always worried they may break down. Anyone at a serious level of wealth, the thinking goes, needs the equivalent of a luxury sedan, with strategic stock choices, hedge funds, private equity, real estate.
In present condition of market, is it worth to buy any ETF's, which one is having lowest cost and also gives better return? I wish to hold it for long period.
Following are the few Code of ETF's at ICICIDIRECT. Which one is better for long span of 1 year or little less?
In present condition of market, is it worth to buy any ETF's, which one is having lowest cost and also gives better return? I wish to hold it for long period.
Since an index fund tracks an index, all index funds tracking the same index should give the same returns. But in reliality it may vary a bit because of 2 things.
- Tracking errors
- Expense ratio.
Of the top of my head, I don't know the tracking error percentage of different index funds, but an article I had read 4-5 years back showed that UTI Nifty Index Fund had the lowest tracking error at that time - it's not an ETF, though. I also think Benchmark ETFs have low tracking errors.
You can compare expense ratios at valueresearchonline.com.
If you want to hold one for a year - I would recommend the UTI Nifty Index fund.
The expense ratio is 1%.
If you want to hold for 3-4 years, I would recommend Benchmark Nifty Index ETF - this has an expense ratio of 0.5% but you will have to pay brokerage at both buying & selling time - so this is good if you are holding for a long time.
Nifty Index composes around 60% of the NSE market capitalization.
If you want to add a second index, add the Nifty Junior - Benchmark has an ETF tracking this. Nifty + Nifty Junior would cover around 70% of the NSE market cap.
Benchmark Nifty Junior has an expense ratio of 1%.
In present condition of market, is it worth to buy any ETF's, which one is having lowest cost and also gives better return? I wish to hold it for long period.
Following are the few Code of ETF's at ICICIDIRECT. Which one is better for long span of 1 year or little less?
Why didn't you invest when nifty was 2200 in 2 summers back.
What about when it was stuck at 3800?
What about when it was stuck at 5400?
Why now, now that risk of falling down has increased?
The very reason that newbies (in a sense who have never burned their fingers in a crash) are bullish make me bearish Their confidence to the brink of arrogance makes me more uncomfortable.
I am not exiting any long positions but also not initiating any new. My current age mandates to invest but the market conditions are forcing me to save.
Anyways I prefer that the market remains low, as low as possible during my investing age. I don't want returns now but a decade later. Stock Market Crash is good for "investors" if it doesn't affect job opportunities.
Graham's sign of an overheated market was lots & lots of rubbish IPO's appearing in the market.
My personal opinion is that though the market is overheated, the possibility of a major crash is low. I don't see the type of unbridled enthusiasm as yet that was there last time round. Almost everyone seems to remember the last crash & seems wary of it. The day people say that this isn't like last year & that market rules have changed & history isn't relevant anymore is the time to start being very scared. People's memory is rather short, so it will happen, just not that soon.
Why didn't you invest when nifty was 2200 in 2 summers back.
What about when it was stuck at 3800?
What about when it was stuck at 5400?
Why now, now that risk of falling down has increased?
Frankly I burnt all my fingers in 2008 crash since 3 years I am in Market, Except few IPO I have made effective loss only, Now I am only investing in IPO , I don't have knowledge of ETF's , recently I invested in GOLDBEES ETF for approx 4000/- Rs , I don't know what to do for surplus money? I am felling tensed for normal equity as I don't know what happned if I buy now a days in this bearish market, But if I invest in ETF's like Nifty Junior or other, I may make lesser loss in event of heavy market fall compare to single equity ?
What are seniors opinion for investor like me?
Except IPO as well as MF/SIP , I always made loss in individual equity so far effectively from span from 2007 to 2010?
Some time I feel it is better to do fixed deposit , at least I will not lose my principal amount.
Frankly I burnt all my fingers in 2008 crash since 3 years I am in Market, Except few IPO I have made effective loss only, Now I am only investing in IPO , I don't have knowledge of ETF's , recently I invested in GOLDBEES ETF for approx 4000/- Rs , I don't know what to do for surplus money? I am felling tensed for normal equity as I don't know what happned if I buy now a days in this bearish market, But if I invest in ETF's like Nifty Junior or other, I may make lesser loss in event of heavy market fall compare to single equity ?
What are seniors opinion for investor like me?
Except IPO as well as MF/SIP , I always made loss in individual equity so far effectively from span from 2007 to 2010?
Some time I feel it is better to do fixed deposit , at least I will not lose my principal amount.
Investing / trading takes a lot of time to analyze the stock price and company.
Since you have made profit in MF/SIP, why not continue with it? .
I have a general question on the expense ratio for ETFs.
How is this charged annually ? For example, if I have 10 units of NIFTYBEES (from Benchmark) in my demat, how are they going to charge the 0.5% expense ratio annually?
I have a general question on the expense ratio for ETFs.
How is this charged annually ? For example, if I have 10 units of NIFTYBEES (from Benchmark) in my demat, how are they going to charge the 0.5% expense ratio annually?
The charge is deducted from the corpus and reflects in the daily NAV quoted. This means that off the outstanding corpus (510 Cr as on 31.12.10), they will charge .5% or 2.5 crores as expense, this is amortized over the year and reflects in the daily NAV.
So the NAV which Benchmark AUM publishes for NIFTYBEES is inclusive of all charges.
The charge is deducted from the corpus and reflects in the daily NAV quoted. This means that off the outstanding corpus (510 Cr as on 31.12.10), they will charge .5% or 2.5 crores as expense, this is amortized over the year and reflects in the daily NAV.
So the NAV which Benchmark AUM publishes for NIFTYBEES is inclusive of all charges.
Thanks for the clarification. I still don't understand how an ETF that is traded on the exchange can charge it's end retail investors an annual expense of .5% ?
Will it be deducted from the dividend payout of the underlying basket of stocks or will it be reflected as a tracking error (since the NAV will go down after taking expenses into account - and a difference in the NAV and the index it tracks will be a tracking error ) ?
Thanks for the clarification. I still don't understand how an ETF that is traded on the exchange can charge it's end retail investors an annual expense of .5% ?
Will it be deducted from the dividend payout of the underlying basket of stocks or will it be reflected as a tracking error (since the NAV will go down after taking expenses into account - and a difference in the NAV and the index it tracks will be a tracking error ) ?
If the expenses are met from the dividend payout of the underlying basket of stocks, then there should be no tracking error. Current NIFTY dividend yield is 1.13% and the expense ratio for NIFTYBEES is 0.5%. Hence, expenses can be met from the dividend yield.
Now an investor can purchase NIFTYBEES both at the exchange and from the fund itself. Check here
In case of primary purchase from the fund, with lot size of 10,000 units, all charges are recovered from the investor upfront. Refer here
So in a nutshell we can say, the costs incurred are
Thanks for the clarification. I still don't understand how an ETF that is traded on the exchange can charge it's end retail investors an annual expense of .5% ?
Do you understand how expenses work for non-ETF mutual funds?
i.e. is your doubt specific to ETFs or all mutual funds?
My question was specific only to ETFs. I had an idea of how expenses were charged for normal mutual funds but I was having some difficulty in understand the expenses as applied to ETFs, although they are pretty much similar.
I do understand better now ( after the explanation by Prudent_Investor ) on the expenses charged for the ETFs. Apart from the dividend , it appears that for some ETFs a part of the cash component in the creation unit can be charged towards expenses.
The Cash Component represents the difference between the applicable net asset value of a creation unit and the market value of the Portfolio deposit. This difference will represent accrued dividends, accrued annual charges including management fees and residual cash in the scheme
Expenses can also contribute to a tracking error :
My question was specific only to ETFs. I had an idea of how expenses were charged for normal mutual funds but I was having some difficulty in understand the expenses as applied to ETFs, although they are pretty much similar.
I do understand better now ( after the explanation by Prudent_Investor ) on the expenses charged for the ETFs. Apart from the dividend , it appears that for some ETFs a part of the cash component in the creation unit can be charged towards expenses.
The Cash Component represents the difference between the applicable net asset value of a creation unit and the market value of the Portfolio deposit. This difference will represent accrued dividends, accrued annual charges including management fees and residual cash in the scheme
All regular mutual funds also maintain cash reserves. As a matter of fact, the need to maintain cash reserves is greater for a regular mutual fund as compared to an ETF.
Regular mutual funds need greater cash reserves for covering redemption, whereas ETFs do not need the same.
Quote:
Originally Posted by sdp1975
Expenses can also contribute to a tracking error :
Index-Based ETF
My question
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Their confidence to the brink of arrogance makes me more uncomfortable. 
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