ETF stats that you can use.
Investors who want to take exposure in equity through mutual funds, have the option of choosing actively managed funds or passive funds. Active funds are those where the fund managers decide which stocks to include and which to leave out of the portfolio. Passive funds, on the other hand, don’t have fund managers deciding the portfolio. Rather, the stocks are selected according to a chosen index.
Exchange traded funds are a type of passive funds where the portfolio mirrors an index of stocks and the proportions they are held in. Investors can choose either active or passive funds based on their requirements and preferences. Here are some reasons why passive funds like ETFs may suit you.
LONG-TERM INVESTOR: If your intended purpose for the investment is to remain with the equity assets for 5-10 years or more, ETFs serve as a good platform.
Over very long periods of time, it is the allocation to the asset class that matters more than specific funds. You can buy the desired ETF, for which you need to choose the appropriate index. ETFs could be designed around overall diversified market indices or even specific sector indices. Thus, even with ETFs, you can choose where you want to be invested. However, keep in mind that investing in sector specific ETFs will be riskier than a broad market ETF and it’s not a strategy that first time investors should adopt.
LOOKING FOR LOWCOST INVESTMENTS: Domestic, actively managed equity funds have expenses of anywhere between 2.25-2.5%, whereas their ETF counterparts have expenses of around 0.3-0.5% on average, and some also have expenses as low as 0.05%. If you want to benefit from equity returns at a very low cost, then ETFs are a good choice.
INABILITY TO SELECT FUND MANAGERS: Investing in active funds requires you to choose between various types of funds and fund managers.
The performance of the fund also reflects the skill of the fund manager. Thus, the long-term performance of your scheme isn’t just dependent on how the equity market does over any period of time, but also on the skill of the fund manager.
You have to be reasonably sure to pick the better-performing funds and ensure that you monitor the performance periodically. Moreover, fund managers often move from one asset management company to another. Once that happens, a new fund manager takes over your scheme, and you have to then evaluate the performance all over again.
In case of ETFs, as there is no stock selection and the fund tracks an index (where changes are relatively less frequent and statistical in nature), all ETFs with the same underlying index deliver more or less the same return.
If you don’t have the time or resources to track fund managers and their performance, long-term investing through ETFs may work well for you. Overseas, the trend is moving towards smart beta ETFs which combine passive management with active selection based on common fundamental or technical characteristics across stocks.