Aug 16, 20213 min read

Will ETFs corner other financial securities in the capital market? : By Anant Rai

Smart investors are those who keep on evolving with time or else they wouldn't be smart investors.

Are you a smart investor or not? You will find that out after going through this article and you will be flabbergasted to know that you are one among them now.

WHAT IS AN ETF?

An ETF or an exchange-traded fund is a financial instrument that has a basket of securities that are traded in the capital market. Creation of portfolios for ETFs can be done by the issuing company within the securities in the same sector or securities from different-different sectors to hedge or diversify the risk for the investor & lure the investors towards their ETF.

COINING OF AN ETF WORD

An ETF is called an exchange-traded fund only because the security is traded between the buyers & sellers on exchanges listed in the market with the help of funds.

HOW CAN ONE BUY & SELL ETF's?

An ETF can be bought or sold in the market just like any other securities i.e. shares being bought or sold in the market. For dealing in ETFs, one must have a Demat account to keep those ETFs bought in the dematerialized form.

TYPES OF ETF's IN THE MARKET

There are multiple ETFs available in the market and accordingly, they are having their types as:

Bond ETFs: Portfolio of debt securities issued by companies & government. Investors earn a fixed amount of interest on holding the ETFs and this type of ETF doesn’t have a maturity date so the principal amount invested could be a sunk cost or repay less of what was invested.

Stock ETFs: Portfolio of shares within the same sector or different sectors. An expense ratio for retail investors is lower for this type of ETF.

Industry ETFs: Portfolio of securities focusing on any specific industry or sector.

Commodity ETFs: Portfolio of different commodities. Equity market investors find these ETFs lucrative because most of their funds are parked in the stocks of different companies so to hedge this they buy Commodity ETFs.

WHY ETF's WHEN OTHER FINANCIAL SECURTIES ARE EASILY TRADED IN THE MARKET?

The contribution of retail investors in the stock market stands at 7% as on date by volume and when talked in terms of turnover less than 45% of the trading turnover on the stock exchange. Investors needed a lot of funds to buy the securities or stocks of their interest to hedge the risk so the expense ratio of retail investors gets increased. ETFs can be the game-changer for those retail investors to lower their expense ratio and at the same time can hedge their risk comparatively lower when buying different- different securities individually.

EARNING THROUGH ETF's

In an ETF, one can earn money through capital gains i.e. increase in the trading price of an ETF in the market, and earn after squaring it off & dividends i.e. the fixed amount of interest on Bonds ETFs.

GROWTH OF ETF's

The Capital gain will happen only if there is a demand for security and demand comes when there are more number of market participants. With the help of infographics, one can easily relate that ETFs will be the next big market segment in the capital market.

FUTURE PROSPECTS OF ETFs

Increasing penetration of government into ETFs through divestment of its stakes or shares in the government-backed companies and increased awareness of ETFs USP led institution & retail investors to invest in this new type of market segment. Good opportunities are there in front of all those millennials out there in the market to earn more profit by lowering their risk and expense ratio, which was not the case with our parents.