Index mutual funds also track baskets of securities. Unlike index funds, which are priced once after the end of each trading session, ETF prices change throughout the day because they're traded like shares. Like shares, they can also be sold short -- a bet that the index value will decline -- and bought on margin using borrowed money.

What are the types of ETFs?

ETFs can be broadly classified as Indexed ETFs and Actively managed ETFs.

Indexed ETFs: Indexed ETFs (sometimes referred to as Classical ETFs) typically offer low management fees, since they have a low operating cost structure.

Actively managed ETFs provide access to a much broader range of investment management styles, strategies, asset classes and operational practices than indexed ETFs.

When the ETF did come into existence?

ETF first came into existence in the USA in 1993. It took several years for them to attract public interest. But once they did, the volumes took off with a vengeance.

Globally, there are around 400 listed ETFs. More than 60 per cent of trading volume on the American Stock Exchange is in this category of funds.

What are some of the biggest ETFs?

The three biggest exchange-traded funds as of Feb. 29, 2008, were the $66 billion S&P 500 SPDR, managed by State Street, the $46 billion iShares MSCI EAFE and the $26 billion iShares MSCI EM, both managed by Barclays.

The most popular ETFs are SPDRs (Spiders) based on the S&P 500 Index, QQQs (Cubes) based on the Nasdaq-100 Index, iSHARES based on MSCI Indices, TRAHK (Tracks) based on the Hang Seng Index and DIAMONDs based on Dow Jones Industrial Average (DJIA).

Who are the major sellers of ETFs?

Barclays Global Investors, the asset-management unit of Barclays Plc in London, is the biggest seller of exchange-traded funds, with a 55 percent share of U.S. ETF assets as of Feb. 29, 2008, according to State Street Corp., which tracks ETF flows. Barclays manages about $306 billion in ETF assets. State Street, based in Boston, is the second biggest seller of ETFs, with about $130 billion in such assets.

How do investors use ETFs?

ETFs are popular among institutional investors to make rapid and large bets on sectors such as oil, gold, waste-management and semiconductors. They also use ETFs to hedge their bets on stocks, bonds, commodities and other securities. In 2007, managers introduced ETFs for use in retirement accounts such as 401(k) plans, as well as life- cycle ETFs, which invest more conservatively as investors near retirement. For individual investors, ETFs offer a wider selection of indexes than mutual funds.

Are ETFs treated as Futures?

Even though ETFs and Futures allow investors exposure to an index, they are different in many regards. While Futures is a derivative product and trades in the F&O segment of NSE, ETFs are a cash market product and trade in the Capital Market segment of NSE. The maximum tenure available for futures is 3 months while ETFs can be held for as long as the investor wants.

What are the Key benefits of investing in ETF?

Diversification: An ETF represents an investment portfolio, which provides diversified exposure to an asset class through a single investment.

Global exposure: Some ETFs invest in a pool of overseas securities, offering investors exposure to a foreign market.

Trades like a share: ETF units are traded like shares listed on a stock exchange. Moreover, market makers may be designated to promote the liquidity of ETF units.

Low transaction costs: ETFs, in general have lower transaction costs than traditional open-ended investment funds. The transaction costs of trading an ETF are similar to those of trading stocks, including brokerage and other relevant fees and expenses payable for dealing through the stock exchange.

Information Dissemination: ETFs being exchange-listed instruments, need to comply with the information disclosure requirements of the relevant stock exchanges. The level of the index and the constituent stocks which make up the index are publicly available information that investors can easily access. Price quotations of ETF units for potential buyers and sellers are available even during exchange trading hours.

What are the disadvantages in ETF?

There is no assurance that the performance of the ETF will be identical to the performance of the underlying index due to factors such as tracking errors.

Although listed on a stock exchange, ETFs face the risk of not being actively traded.

The market price of the ETF unit could be higher or lower than its NAV per unit due to market demand and supply and liquidity.

Which is the First ETF in India?

The first ETF in India, based on Nifty 50, was the Nifty Benchmark Exchange Traded

Scheme (Nifty BeES). This was launched by Benchmark Mutual Fund in December 2001. It is bought and sold like any other stock on NSE.

Over the past three years, few more ETFs have been introduced, they are: Junior Nifty BeES based on CNX Nifty Junior, S&P CNX Nifty UTI Depository Receipts Schemes (SUNDER) based on Nifty 50, Bank BeES (Banking Index Benchmark Exchange Traded Scheme) tracking the CNX Bank Index. Further, the Benchmark Mutual Fund launched a money market ETF in India which is incidentally the only money market ETF in the world. It is known as the Liquid BeES (Liquid Benchmark Exchange Traded Scheme). Prudential ICICI Mutual Fund also launched an ETF based on the BSE Sensex, SPICE (Sensex Prudential ICICI Exchange Traded Fund), trading for which started on January 13, 2003.

What are Gold Exchange Traded Fund?

A gold exchange traded fund unit is like a mutual fund unit whose underlying asset is Gold and is held in demat form. It is typically an Exchange traded Mutual Fund unit which is listed and traded on a stock exchange.

Every gold ETF unit is representative of a definite quantum of pure gold and the traded price of the gold unit moves in tandem with the price of the actual gold metal. The underlying asset in case of a gold ETF is gold which is held by a mutual fund house issuing such units either in a physical form or through gold receipt giving right of ownership. Authorised participants can redeem the gold ETF units and can demand equivalent value of actual pure gold at any time. By means of a Gold ETF (GETF), investors can participate in the gold bullion market without taking any physical delivery of gold and buying and selling through trading of a security on a stock exchange. The GETF aims at providing returns which closely correspond to the returns provided byGold.

• Transparency

• Affordable

• Highly Liquid

• Lower cost

• Low tracking error

What is the Significance of GETFs in India?

India is the world's biggest consumer of gold and consumes 700 to 800 tonnes on an annual basis. The major use of gold is for jewellery making.

Comparison of ETFs with other mutual funds