ETF – Exchange traded fund example: Finance Trading Times

ETF – Exchange traded fund example

In this article, I’ll be explaining an example of ETF or Exchange Traded Fund – which is requested by some of the readers. As again, though it will be early for me to introduce another efficient investment strategy, I will attempt to highlight a few practical example of ETF which are trading in the market for some time.

For people who are looking for investment strategies, I have a few questions for you at the end of this article. Please make sure that you respond to those questions by putting your responses in the comments.

Continuing with the article: How are these ETF’s created, issued and redeemed by the investors. Here’s what goes on:

As we all know that ETF is based on an index – like Dow Jones, Nifty or Sensex. ETFs are a bit different from Mutual funds in the sense that ETF units are not sold to the public for cash. Instead, the Asset Management Company (Say UTI or Franklin Templeton) that sponsors the ETF (Fund) takes the shares of companies comprising the index from various categories of investors like authorized participants, large investors and institutions. In turn, it issues them a large block of ETF units. Since dividend may have accumulated for the stocks at any point in time, a cash component to that extent is also taken from such investors. In other words, a large block of ETF units called a "Creation Unit" is exchanged for a "Portfolio Deposit" of stocks and "Cash Component".

Some investors may prefer to hold the creation units in their portfolios. While others may break-up the creation units and sell on the exchanges, where individual investors may purchase them just like any other shares.

ETF units are continuously created and redeemed based on investor demand. Investors may use ETFs for investment, trading or arbitrage. The price of the ETF tracks the value of the underlying index. This provides an opportunity to investors to compare the value of underlying index against the price of the ETF units prevailing on the Exchange.

Now, let’s look at an ETF or Exchange Traded fund called – NIFTYBees. This ETF is available for trading on NSE since 8-Jan-2002. On the issue day, the opening price of this particular ETF was 120 Rs, while it closed at 111.55 Rs. Yesterday, on 19th July 2007, the closing price of this NiftyBees ETF stock was 460 Rs. In terms of the percentage gains:

(460-111.55)

------------------

*100

=

312.37%

111.55

The Nifty Index, had a closing value of 1109.9 on 8-Jan-2002; while yesterday, 19th July 2007, it closed at 4562. The percentage gains for Nifty (underlying Index) has been:

(4562-1109.9)

------------------

*100

=

311.03%

1109.9

Compare the returns from Nifty Index (311.03%) to that of those from NiftyBees ETF (312.37%). They are almost exactly the same - with hardly any difference. Moreover, due to the trading activities, it is possible to get a higher value for ETF during the day as the trading proceeds. If you had bought this NiftyBees ETF on 8-Jan-2002 by investing say 1 Lakh Rs., your investment would have grown to a total of 412,371 Rs., giving you a clear cut net profit of 3.12 Lakh Rs. that too in just over 4 years time. It translates to an simple average return of 312/4.5 = 70% return for each individual year.

You would have hardly paid a maximum of 1% brokerage on buying the ETF and another 1% on selling the ETF. That will hardly make any significant difference to your profits.

Which Insurance policy or mutual fund or your own stock picking skills would have given you such staggering returns. I see ads in newspapers – XYZ mutual fund returns 80% in just one year! – what happens the next year? The same mutual fund is not able to keep up its performance – so no ads in the next year claiming excellent profit. Ads that are posted will only be for promotion of mutual fund, not for claiming good returns.

Which Insurance policy, clubbed with returns would have given you such returns – atleast I don’t know of any.

How have your own stock picking skills figured? Were you able to get the same level of profits on your individual investment?

What’s the cost that you pay to trade in ETFs? Hardly a maximum of 2% - 1% on buying, another on selling. Hold them for long term and tax you pay on these will be zero.

I’ve already proven in my previous article

explaining efiicient market hypothesis, that it is impossible for anyone to beat the market consistently year after year. The best you can do is to carry on and go with it, attempting to match the performance of the market. ETFs do exactly that.

Then there are others who say that by investing in so called bluechip companies or top level index based ETFs, we loose on the mid-caps which can outperform the market. For such investors, there is JUNIORBees – a midcap based ETF based on Nifty Junior (comprising of top 51 to 100 stocks).

Have a look at the closing prices of JuniorBees on 11-Feb-04, it was 34 Rs. While yesterday, it was 92.5. The percentage increase has been 172.06% over the period.

While for the same period, Nifty itself has closing value of 1891 on 11-Feb-04 and 4562 yesterday. The percentage gain is 141.25%. Here the Junior ETF has outperformed the main market index by more than 30%.

One thing to note here is that all the ETFs started in India after 2001 period. This was the period where the Indian Markets have seen a major Bull run and hardly very short periods of bear markets. However, the ETFs have been proven to be the most efficient instruments as I’ve explained in the table presented in my previous article

http://invest-n-trade.blogspot.com/2007/07/index-funds-vs-exchange-traded.html> Index Fund v/s Exchange Traded Funds, What’s good Whats Bad?. The best part of ETFs is that you always go with the market.

There was a demand from some readers about a practical example of an Indian ETF. I guess the data presented above should be sufficient to make them understand the working of ETF and it’s efficiency. Readers who may like to verify the data presented here can do so by downloading the data from Yahoo finance or exchange websites.

For individuals who have been asking or are interested in asking about the so called efficient investment strategies, please respond to the following questions:

  1. Are you familiar with the trading and working of derivatives like options and futures? (Yes/No)
  2. Are you familiar with the pricing of options (Yes/No)

Kindly respond, as I will proceed further based upon the readers responses, else I’ll carry on in my own style :- ).

In case your response to the above 2 questions is No, then I cannot explain the next level of investment strategies immediately. I will have to introduce 2-3 articles explaining the working of these instruments and how they can be used to form efficient investments. You can expect the same easy-2-understand articles, similar to the once I’ve posted for introducing ETFs and IFs for http://invest-n-trade.blogspot.com/2007/06/simplest-investment-strategy.html The Simplest Investment Strategy.

Keep visiting this blog for further content.

Please read the comments and post your views and queries in the comments section which helps in open discussion and avoid duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

Have Comments or Questions? Please post them as comments using "Post our Comments" link below. Your queries will be responded for free in 24 hrs!

19 Comments: Post your Comments

manishk said...(on 20 July 2007 at 03:59 )  

Hi ,
I am not familiar with the trading and working of options. It would be great if you can teach us about it.

Anonymous said...(on 20 July 2007 at 04:46 )  

Hello,
First thank U very much for your valuable informations. Please tell us the way trading and working system of Future and Options works.

Anonymous said...(on 20 July 2007 at 05:30 )  

1. Are you familiar with the trading and working of derivatives like options and futures? (Yes/No)

Answer : No

2. Are you familiar with the pricing of options (Yes/No)

Answer : No

Would be nice if you clear these things :)))

Thanks a lot

Anonymous said...(on 20 July 2007 at 07:15 )  

1. No
2. No
Please go through the whole strategy step-by-step

shashi said...(on 20 July 2007 at 20:28 )  

so far never bothered to learn ll that

ANIL RAI said...(on 21 July 2007 at 09:41 )  

Hi Shobhit,
I have read all your articles with keen interest, not only once but many times, just because of simple reason they are are so easily understandable because of real life examples which you have chosen taking into account basic mindset of novice investors. You deserve all the appreciation from all of us who keenly follow your articles and look forward to next one. I have been constantly forwarding your articles to all my near and dear ones. As far as your question regarding Futures and Options is there- I have heard about it-thats it. Don't know exactly how these instruments can be put to better use. We will be really glad if you could spare little time to write something about F&O. You are doing a good job and my sincere appreciation to you. All the best.

Saravanan said...(on 22 July 2007 at 00:43 )  

Hi Shobit,

I am very keen to know more about Futures and Options. I have knowledge about them but still I am sure I can always learn from the "Guru".

Thanks a ton for your articles.

Request to all readers: Please do click on the google ads. I feel its a way to return back our gratitude to the "Guru".

Saravanan

Saravanan said...(on 22 July 2007 at 01:15 )  

Hi Shobit,

I wanted to know more about ETF. In your blogs you have mentioned mostly about ETF as a good option for investing. I am with you but I dont know how to buy the ETF, I am trading using icicidirect.com. I dont know whether is it possible to buy ETF through icicidirect or not? It would be of great help if you let me know how to buy the ETF and where?

Saravanan

Anonymous said...(on 22 July 2007 at 04:45 )  

hi,
first thanks for your education..
really i dont future and options trading, regarding this option i am expecting some article form you,
if u given artivle on optitons is great for us.........
tahnks

ANIL RAI said...(on 22 July 2007 at 21:49 )  

Hi Saravanan,
Yes you can buy ETF through ICICI Direct in the same way as you buy shares. Code for NIFTYBEES is "NIFBEE" and for Nifty Junior is "NIFJUN". I think there is minimum limit for UTI ETF-"SUNDER",which is also available on ICICI Direct. Even Gold ETF is also available for thos interested in investment in GOLD. GOLD ETF of UTI has icici direct code"UTGOLD".

Vidisha Apte said...(on 22 July 2007 at 22:27 )  

HI Shobhit,

I dont know anyhting about Options.

Regards,
Vidisha

prasad said...(on 23 July 2007 at 01:44 )  

Please tell us about the trading and working of derivatives like options and futures and the pricing of options.

Regards,
Raghavendra

Investment n Trading Advisor said...(on 23 July 2007 at 22:02 )  

Dear Anil.

I have a request for you.
You've simply copied my articles and posted on your blog. It is NOT a good thing to copy others articles.
I request you to please avoid doing so.

If you really like my articles, then please keep a link of these articles on your site. Please do not copy and paste the entire article and post it on your blog.

Thanks,
Shobhit

Vinay said...(on 25 July 2007 at 23:21 )  

Hi Shobith,

You have listed a couple of EFTs in your article, could you please suggest all other available EFTs (In Indian Market).

I searched on couple of websites but could not fing a whole lot of information.

Thanks
Vinay

Investment n Trading Advisor said...(on 26 July 2007 at 00:37 )  

Vinay,

You should visit the NSE India website and look at the ETF section.

Tejas said...(on 12 August 2007 at 13:38 )  

Hi Shobhit,

Keep it up..and helping us understanding ABC of stocks.

Can you provide further information regarding Gold Exchange traded fund?

I know some details by referring the offer documents, but the taxation seems to be bit difficult to understand. Also, since it is not a equity, long term capital gains eats away the profit as well.

Can you help me and many others on this blog who might be interested in this?

With regards
Tejas

aragorn said...(on 26 August 2007 at 05:55 )  

Hi,

1st of all, thanks a lot for teaching something that has not been touched upon in our entire academic career.
My answers to the aforementioned questions are 'No'
So please do explain about 'Future and options'.

Regards,
Sujeet

nidhi said...(on 22 October 2007 at 04:05 )  

Hi,

I am a novice in investments but have been weighing most of the products in the market and completely agree with that Insurance selling is completely Emotional backmails that these Agents do!!!!

As to this articel I just wanted to know are ETF the Index funds..im really not sure, so thgt to check with you. And the answer to yuor questions is NO.

Await your response.Thanks for sparing time t write such informative articles.

Regards
Nidhi

Neil said...(on 11 November 2008 at 08:11 )  

Shobhit,
1) what is difference between liquid funds and in liquid Bees(ETF)?
i am asking this question because Benchmark asset mgmt company markets/positions this product as "EARN BETWEEN TRADES".
So does it serve same purpose as liquis funds?
2) In today's turbulent market, is it better to keep funds in bank fixed deposit or in liquid fund/benchmark liquid Bees?
historically what has given better returns,bank FD or liquid funds? how much return?
3)If the returns of liquid Bees are re-invested and price is kept constant to 1000, when do we get the returns from it?
4) Is liquid fund/Liquid Bees useful to common investor?

Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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