Reasons investors use ETFs and how to select them

Exchange Traded Funds (ETFs), which typically invest in constituents of an index and give investors exposure to a pool of securities, are gaining popularity among investors. The meteoric rise of the asset under management (AUM) of ETFs is reflective of the same. From less than 200 ETFs that were present at the start of millennium worldwide, ETFs have now reached to around 5,000. The AUM in the same period has exploded from US$ 204 billion to US$ 4 trillion today. The growth was at a scorching pace of more than 20% annually. The inflexion point was the financial crisis of 2008 that provided further boost to ETFs. Even in India, ETFs are witnessing an impressive rise. AUM of Equity ETFs tracking Nifty indices in India have reached Rs. 36,803 crore as on March 2017, as against Rs. 12,865 crore as on March 2016.

Benefits of ETFs

The reason for such a spectacular rise of ETFs is manifold. First, they come in different shape and sizes, which means ETFs cover various assets including equities, commodities, fixed income securities etc and there are further sub-divisions. This is a delight for asset allocators. They get a huge range of options to optimally diversify their portfolio. For retail investors, it may give them access to certain asset categories which they wouldn’t be able to access otherwise, due to accessibility or cost. Besides, investors know what they are investing in. You can always check what is beneath the hood and you do not have to wait until the end of the month to know the shares in which your fund have invested. ETFs also provide flexibility in portfolio management, you can buy and sell at any point of time whenever exchanges are open.

How to choose the right ETFs

Whether you are saving for buying a house or car, it’s important to understand what you are trying to accomplish. Accordingly, you can choose a right ETF that would help you reach that objective. Nonetheless, in India, we do lack diversity in ETFs. After zeroing in the type of ETFs you are going to invest in, take the proper time to evaluate different ETF providers. Check their experience and tenure of existence and then you can commit your funds. Finally, you need to understand the cost involved while investing in ETFs. Expense ratios are one of the important factors, however, they are not the only cost that needs to examine.