Exchange traded funds

*Returns are subject to Tracking Error

While ETFs have a low expense ratio, they do have some charges that are specific to them. Because ETFs, like stocks, are purchased as shares through a broker, an investor must pay a brokerage commission each time he or she makes a purchase. In addition, an investor may incur the standard fees of stock trading, such as disparities in the ask-bid spread and so on. Traditional mutual fund investors, on the other hand, are indirectly susceptible to the same trading charges because the fund pays for them.

ETFs have specific risks in spite of their diversification benefits. Generally, the risk associated with investing in ETFs are broadly classified into:

• Risk related to the Market: ETFs are exposed to market risks like stock and other mutual funds in spite of their diversification benefits. The broader the index that an ETF tracks, the lesser will be its’ market risk, but it can’t be completely eliminated.
• Liquidity risk: ETF liquidity has two components – first is the volume of ETF units traded on the exchange and the liquidity of the individual securities in the portfolio. The counter of ETF may tend to have a higher bid-ask spread in case of volatility in the market. Similarly, any security with insufficient liquidity in the portfolio of the index may also lead to inefficient tracking which in turn leads to differences in returns.
• Portfolio Risk: There are many kinds of ETFs available in the market including international and exotic ETFs. Hence, selecting the right ETF to meet investors’ needs is the key to avoiding risks associated with the portfolio. Portfolio risk could be additionally topped with Currency Risk, Counter-Party risk, Geo-Political risk, and sector-specific risks.
• Risk related to structure: ETFs can have different structures depending on what they invest in and how they distribute the capital gains from the portfolio. This can affect the tax liability of the investor. For example, ETFs using in-kind exchanges do not distribute capital gains to end investors while ETFs involving derivatives or commodities may have complex structures and tax implications. ETFs also face Tracking Error i.e. their return will deviate from the return of the underlying index because an ETF incurs certain expenses that the index doesn’t face.

1. Login to kotaksecurities.com
2. Click on ETFs and select the ETF you want to invest in
3. Place order and click on Buy/Sell
4. It will redirect to the equity order placement page where you need to enter details like Price, Quantity, and some other details and submit order