Exchange Traded Funds: A Comprehensive Guide
Overview of Exchange Traded Funds (ETFs)
Exchange Traded Funds (ETFs) are a revolutionary financial product that combines the benefits of mutual funds and stocks. As a regulated investment vehicle, ETFs are listed and traded on recognized stock exchanges. They offer investors exposure to a diversified portfolio of assets and can be accessed easily like stocks. This comprehensive guide delves into the world of ETFs, discussing their key characteristics, types, requirements, and the advantages they bring to investors.
Types of ETFs and their Key Characteristics
- Equity Index-based ETFs: Designed to replicate the performance of an equity index, such as those in the IFSC, India, or other jurisdictions, by investing a minimum of 95% of total assets.
- Debt Index-based ETFs: Aimed at mimicking the performance of a debt index, these ETFs invest at least 90% of total assets in debt instruments of the IFSC, India, or other jurisdictions.
- Commodity-based ETFs: These ETFs invest a minimum of 90% in a specific commodity or related securities and instruments.
- Hybrid ETFs: Designed for investors seeking exposure to multiple asset classes, these ETFs invest in two or more asset classes, providing diversification and potential upside.
- Actively Managed ETFs: These ETFs offer active portfolio management, where the Fund Management Entity (FME) has the discretion to adjust the portfolio composition based on stated investment objectives and policies.
Launching an ETF
Launching an ETF requires compliance with specific regulations and procedures. Key steps include:
- Registration as an FME: Only registered FMEs (Retail) can launch an ETF.
- Filing with the Authority: The FME must file the ETF with the Authority, accompanied by the application fees, at least 21 working days before the launch.
- Incorporating Authority’s Comments: The FME must incorporate the Authority’s comments into the offer document before the launch.
- Approval from Recognized Stock Exchange: Actively managed ETFs require prior approval from the recognized stock exchange(s) where they aim to be listed.
Key Features and Benefits
- Mandatory Listing: ETF units must be listed on at least one recognized stock exchange within IFSC, offering investors a transparent, regulated, and liquid trading platform.
- Direct Redemption: Investors can directly approach the FME for the redemption of ETF units, providing flexibility and convenience.
- Exemption from Exit Load Charges: Investors are not subject to exit load charges when redeeming ETF units under specific conditions, such as consistent trading at a discount to Net Asset Value (NAV) or limited quotes on the exchange.
Market Makers for ETFs and Their Roles
Mandatory market maker requirements ensure liquidity and efficient trading in ETFs. Here are key aspects:
- Appointment of Market Maker: FMEs must appoint a market maker responsible for providing liquidity through two-way quotes and creating/redeeming units directly from the FME.
- Recognition by the Recognized Stock Exchange: Market makers must meet certain criteria set by the recognized stock exchange, including rules on spread, quantity, incentives, margining, and net-settlement.
The Advantages of ETFs
- Diversification: ETFs offer exposure to a diversified portfolio of assets, reducing risk compared to investing in individual securities.
- Liquidity: ETFs trade on recognized stock exchanges, allowing investors to buy or sell shares at any time during market hours.
- Cost Effectiveness: ETFs typically have lower expense ratios than traditional mutual funds, making them an attractive option for cost-conscious investors.
- Transparency: ETFs publish their holdings daily, enabling investors to monitor the underlying assets and make informed investment decisions.
Conclusion
Exchange Traded Funds (ETFs) offer a wide range of investment opportunities with various types to suit diverse investor needs. This comprehensive guide has provided valuable insights into the world of ETFs, covering their key characteristics, launching requirements, benefits, and market maker roles. Whether you are an investor seeking diversification or a Fund Management Entity (FME) considering launching an ETF, this guide equips you with the knowledge to make informed decisions in the ever-evolving ETF landscape. Explore the potential of ETFs and revolutionize your investment strategy today.
