ETFs vs Index Funds

1
ETFs vs Index Funds
Ghazal Jain Associate Fund Manager, Alternative
Investments 24th Sept 2021
2
Active Investing Passive Investing
Active Investing
Passive Investing

• Aim to beat the markets returns
• Active selection of securities, thus higher
  expense ratio
• Involves buying and selling of individual
  securities or actively managed mutual funds

• Aim to track the markets performance
• No active decision in choosing securities , thus
  lower expense ratio
• Involves buying and holding Index funds and/or
  ETFs

3
What are ETFs?
3

• ETFs Exchange Traded Funds
• ETFs are passive instruments that closely track
  an index

Graph is for indicative purpose only
4
How do ETFs work?
4

• An ETF is a basket of securities
  (stocks/bonds/gold) , units of which are sold on
  an exchange
• Investors can buy units of that basket, just like
  buying shares of a company
• Like mutual funds, ETF units represent partial
  ownership of underlying basket of securities
• Your investment in the ETF could increase or
  decrease in value as the price of the underlying
  stocks/bonds/gold changes
• Like individual stocks, buyers and sellers trade
  the ETF units throughout the day at prices that
  change based on supply and demand

5
The most common types of ETFs in India are
Equity ETFs track a particular index of stocks.
The index may be based on the companies
size, region, industry
Bond or Fixed Income ETFs track a portfolio of
corporate and/or government bonds
Gold ETFs track the price of gold
6
Equity ETFs
ETFs track a particular index of

• Equity stocks.

• They aim to track the price of the index and
  mimic its returns

Stock A
Stock B
Stock C
CASH
50 stocks of Nifty Index
NIFTY ETF
ETF UNITS
Graph is for indicative purpose only
7
Benefits of Equity ETFs
Better Diversification
Lower costs than Actively managed Mutual Funds
Tax efficiency
Flexible trading
Being passive products, they tend to have lower
expense ratios than actively managed mutual funds
8
Gold ETFs

• Gold ETFs are Investment vehicles that invest in
  physical gold

• They aim to track the price of gold and generate
  returns in line with the returns of physical gold

CASH GOLD ETF ETF UNITS
Graph is for indicative purpose only
9
Features of Gold ETFs

• Gold ETFs, even though a financial form, are very
  real as each and every ETF unit is backed by 24
  carat physical gold
• Buying Gold ETFs means you are purchasing gold in
  an electronic form. When you actually redeem Gold
• ETF, you dont get physical gold, but receive the
  cash equivalent
• Just as shares represent the extent of equity
  ownership in a company, units represent your
  extent of
• ownership in the ETFs underlying asset i.e. gold
• Gold ETF units are listed and traded on NSE and
  BSE. You can buy and sell gold ETFs using a DEMAT
  account just as you would trade in stocks
• Gold ETFs combine the flexibility of stock
  investment and the simplicity of gold investments

10
Benefits of Gold ETFs

• Each and every ETF unit is backed by 24 carat
  physical gold
• Stored in accredited professional vaults
  Investors do not have to worry about purity,
  storage, and insurance of gold

Purity

• No making charges or high premiums
• Gold ETFs transfer benefit of wholesale purchase
  prices to investors
• Benefit of GST credit at Scheme level time of
  selling gold
• Traded close to the market price of physical
  gold, with thin difference between buying
  selling price

Price efficiency
Liquidity

• ETF units can be continuously bought and sold on
  the NSE and BSE

• They offer investors a means of participating in
  the gold market at low denominations of 1/2 gm

Accessibility

• You can purchase and sell online with a DEMAT
  account from the comfort of your home

Convenience
Regulation

• Gold ETFs are regulated by SEBI

11
Costs of an ETF
11

• Explicit Costs
• Expense ratio
• Brokerage commissions
• Implicit Costs
• Tracking error
• Bid-ask spreads

12
What are Index Funds?
12
Passive mutual funds that copy performance of an
index like Sensex or Nifty
Hold same securities as index in same proportions
Buys or sells securities only when composition of
Index changes
13
Benefits of Index funds
Better Diversification
Lower costs
Tax efficiency
14
ETFs vs Index Funds
14
ETFs Index Funds
Investment Offers exposure to assets of a benchmark index Offers exposure to assets of a benchmark index
Management Passively managed Passively managed
Buy/Sell Can be bought or sold at real time NAV Can be bought or sold only at the end of the day at NAV
Liquidity Buy and sell on exchange Buy and sell with AMC only
Performance Similar to or lower than the benchmark index Similar to or lower than the benchmark index
Costs Expense ratio (0.1-0.5) Brokerage commissions Expense ratio (0.5-1.5)
DEMAT account Required Not required
SIP facility No Yes
15
Limitations of ETFs and Index funds
15

1. They dont offer flexibility to the fund manager
   in managing market downsides
2. They simply mimic an underlying benchmark and
   hence cannot generate alpha
3. Index funds lag their benchmark returns due to
   the presence of tracking error

16
Which passive investment should you opt for?
16

• While choosing between an ETF and index fund,
  investors need to weigh the pros and cons of
  both the passive avenues
• Broadly, if you are seeking convenience, index
  funds are likely to be the right choice
• But if you want cost advantage and want to time
  your entry and exit based on your
• analysis of the markets, ETFs are likely to be
  the better alternative
• For both ETFs and Index funds, you should pick a
  fund with minimum tracking error

17
The choice should not be Active or Passive, it
should be Active AND Passive

• Large cap space efficient and widely covered
  ETFs and Index Funds
• Mid /small caps, Value style, ESG investing
  Scope for active management

18
Disclaimer Terms of Use
The data in this presentation are meant for
general reading purpose only and are not meant to
serve as a professional guide/investment advice
for the readers. This presentation has been
prepared on the basis of publicly available
information, internally developed data and other
sources believed to be reliable. Whilst no action
has been suggested or offered based upon the
information provided herein, due care has been
taken to endeavor that the facts are accurate and
reasonable as on date. Quantum AMC shall make
modifications and alterations to the performance
and related data from time to time as may be
required as per SEBI Mutual Fund Regulations.
Readers are advised to seek independent
professional advice and arrive at an informed
investment decision before making any investment.
None of the Sponsors, the Investment Manager,
the Trustee, their respective Directors,
Employees, Affiliates or Representatives shall be
liable for any direct, indirect, special,
incidental, consequential, punitive or exemplary
damages, including lost profits arising in any
way from the data/information/opinions contained
in this presentation. The Quantum AMC shall make
modifications and alterations to the performance
and related data from time to time as may be
required. Please visit www.QuantumMF.com to
read scheme specific risk factors. Investors in
the Scheme are not being offered a guaranteed or
assured rate of return and there can be no
assurance that the schemes objective will be
achieved and the NAV of the scheme may go up and
down depending upon the factors and forces
affecting securities market. Investment in mutual
fund units involves investment risk such as
trading volumes, settlement risk, liquidity risk,
default risk including possible loss of capital.
Past performance of the sponsor / AMC / Mutual
Fund does not indicate the future performance of
the Scheme. Statutory Details Quantum Mutual
Fund (the Fund) has been constituted as a Trust
under the Indian Trusts Act, 1882. Sponsor
Quantum Advisors Private Limited. (liability of
Sponsor limited to Rs. 1,00,000/-). Trustee
Quantum Trustee Company Private Limited.
Investment Manager Quantum Asset Management
Company Private Limited. The Sponsor, Trustee and
Investment Manager are incorporated under the
Companies Act, 1956. 24th September 2021 Mutual
fund investments are subject to market risks,
read all scheme related documents carefully.
19
Thank You
19