Financial Daily from THE HINDU group of publications
Sunday, Jul 07, 2002
Financial Daily from THE HINDU group of publications Sunday, Jul 07, 2002 |
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Investment World
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Insight Markets - Mutual Funds Columns - Simple Economics Explaining exchange traded fund B Venkatesh
THIS article explains the concept of an exchange traded fund (ETF). An ETF is a combination of an open-end and a close-end fund. Like any open-end fund, you can buy units with the fund. But there is a difference. In an open-end fund, you will pay cash to buy units. In the case of an ETF, you are required to provide the underlying shares to buy the units. Take Nifty BeEs, the only ETF currently available in India. This ETF is sponsored by the Benchmark Asset Management, and tracks the S&P CNX Nifty index. If you want to buy units from the sponsor, you will have to deliver shares constituting the Nifty index in the proportion defined by Benchmark. Of course, it will be very costly for retail investors to do that! That is why authorised participants have been appointed to buy units from the sponsor. The units that the participants buy from the sponsor can then be traded in the stock exchange, just as the units in a close-end fund. So, do not bother about not being an authorised participant. You can buy the ETF units directly from the stock exchange, like you buy shares of Infosys and Satyam. The Nifty BeES are priced at one-tenth of the S&P CNX Nifty value. This makes it easy for you to buy/sell units in the secondary market. Now, what if you want to redeem the units and not sell them in the secondary market? Unfortunately, you cannot do that. Only authorised participants can sell the units to the sponsor, and receive the shares constituting the Nifty. In some ways then, you can consider an ETF to be a close-end fund. But an ETF does not sell at a discount to its net asset value (NAV) like a close-end fund, an issue we will discuss in the coming week.
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