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    How much do you know about ETFs? - ABSLMF

    How much do you know about ETFs?

    • Q1. ETF stands for:
      • Wrong!

        Exchange Traded Fund

        Bullseye on your first try! ETF does indeed stand for Exchange Traded Fund because it can be traded on a stock exchange despite not being a typical stock. An ETF is a basket of securities (like a mutual fund) that can be bought and sold on an exchange (just like a stock). Thus, it combines the advantages of both investment instruments successfully.

        Gotcha! Many people do get confused since ETFs are traded just like equity stocks. However, ETF actually stands for Exchange-Traded Fund, since they can be bought and sold on an ex-change like regular securities.

        Oh no! Looks like the first word threw you off. ETF stands for Exchange-Traded Fund. ETFs are like a basket of securities (similar to mutual funds) that can be directly bought and sold on an exchange (just like stocks). No need for tokens or forms here!

        Oops, wrong answer on the first go. While ETFs can be bought and sold easily online, they ac-tually stand for Exchange-Traded Fund, not Electronic Transfer Fund. This is because these unique investment instruments can be traded on an exchange, similar to regular securities and stocks.

    • Q2. ETF is a type of mutual fund:
      • Wrong!

        False

        Ahh! That’s wrong. Well, it’s a tricky one as ETFs and mutual funds look similar to an investor. They both give an investor exposure to a basket of investments managed by a fund manager for a small expense ratio. But they are different in many ways.

        Bang on target! You sure are good, as that was a tricky one. ETFs are a bridge between mutual funds and exchange traded securities. Like mutual funds, ETFs give you units of the underlying security. But ETFs are passively managed funds that you can buy like a stock. Unlike mutual funds that have a minimum investment amount, you can buy even one unit of an ETF.

    • Q3. Which of these do you need to invest in ETFs?
      • Wrong!

        All of the above

        You are almost right. You do need money to buy ETFs, although they are much more budg-et-friendly than buying a bunch of different kinds of securities separately. Since ETFs are a basket of diversified securities that are passively-managed, their overall expense ratio is also reasonable. But the other 3 options are also must-haves when it comes to ETFs. So the correct answer is (d) All of the above.

        You are not wrong, but not completely right either. In India, you must have a demat ac-count to be able to buy and sell ETFs. They need the stock trading infrastructure to be able to give you the benefits of trading. But you also need money and basic knowledge of in-vesting and trading. So the right answer here is (d) All of the above.

        Welllll, almost yes, but not quite. It’s true that many new investors invest in ETFs when they start their investing journey, thinking it is easy as ETFs simply replicate a particular in-dex. But you still need basic knowledge of stocks and commodities to determine which ETF to buy. And for buying an ETF you need money and a demat account too! So while you are right, the real answer is (d) All of the above.

        You’ve hit the nail on the head! Yes, you do indeed need all of the above things to be able to trade efficiently in ETFs: money to buy the ETF of your choice, a demat account is a must, and perhaps most importantly, a basic know-how of investing in the stock market to make informed decisions about which ETF suits your investing goals best.

    • Q4. ETFs replicate the price movements of –
      • Wrong!

        A Stock Index

        We can’t believe you fell for that one! ETFs have nothing to do with the weather at all. They follow a particular stock index, replicating its movements at all times. So no matter what the financial weather of the economy is, your ETF will always flow with its chosen in-dex.

        Wrong answer. An ETF actually follows and replicates a particular stock index, be it Equity indices like the Nifty50 or Sensex, or commodity indices like gold or silver. While the GDP can affect the stock and commodity prices, an ETF will always track its chosen index and replicate it exactly.

        Oh no no! ETFs do not replicate inflation rates! In fact, every ETF mimics one specific index like the Nifty50 Mid Cap Index or a gold index. No matter what the inflation rates, the ETF continues to follow and replicate that particular index only. Although some ETFs some-times help beat inflation in the long run.

        Bingo! Right answer. Every ETF tracks and replicates a particular index only, be it an equity index, commodity index or even sectoral or thematic indices such as Auto, Banking, Healthcare, etc.

    • Q5. ETFs have lower expense ratio than traditional mutual funds.
      • Wrong!

        True

        You are a genius! ETFs are passively-managed funds, meaning they do not require constant monitoring and adjustment by an expert fund manager. Since they replicate a particular index, they simply follow the movement of the index. Thus, the expense ratio is also minimal, making sure you have more money in hand!

        Sorry, but no. ETFs actually have a very nominal expense ratio. Since they mimic a particular index as is, they do not need investment expertise of a fund manager. This brings down the expense ratio immensely, and saves you a lot of money (which you can use to invest in more ETFs, ha ha!).

    • Q6. Which of the following statements is incorrect about ETF trading?
      • Wrong!

        ETFs NAV is determined only at the end of each trading day.

        Ooh! You are right, but wrong. Your ETF knowledge is very good and you are right that ETFs can be traded intraday just like a stock. But the answer is wrong because the question is to identify the incorrect statement.

        Well done, but a slight miss. The question is to identify the wrong statement. But it is 100% right that ETFs trade over the counter. As bonds don’t trade on the stock markets, bond ETF are exchanged over the counter with the aid of brokers.

        You are the ETF Baazigar! Absolutely correct. ETFs trade like stocks during normal trading hours. Like stocks, demand and supply determine their price. It is the mutual fund whose NAV is determined at the end of each trading day. As you saw before, ETFs are not mutual funds.

        Oh no no no! This is not right. There was one wrong statement up there. It is true that ETFs trade just like stocks, intraday and over the counter. But their price is also determined like stocks through demand and supply forces. It is the mutual fund whose NAV gets calculated at the end of the trading day. So the right answer is Option (c).

    • Q7. Which of these is not a type of ETF?
      • Wrong!

        Knowledge ETF

        Ahh right, but not right. There is a Gold ETF in India and you can buy it on the exchange. This ETF holds 99% pure gold as an underlying asset and gives you exposure to the price of that holding.

        Better luck next time. Index ETF is the most common type of ETF. For eg. The ABSL Nifty ETF tracks the stocks that are traded on Nifty 50. There are other index ETFs as well.

        Sorry! There are international ETFs available on the exchange. They give you exposure to indexes of internal stock exchanges like Nasdaq Composite Index, S&P 500 Index, and FTSE 100 Index.

        Absolutely right! While there may yet come a day when even this might become a reality, as of today the only way to invest in true knowledge is through observation, research and experience.

    • Q8. Which of the following statements is true about ETFs?
      • Wrong!

        All of the above

        Yes, but not the right answer. ETFs sure are a great way to invest in gold and silver without spend-ing all your life’s savings. Just one unit of gold ETF gives you exposure to gold price. The right an-swer to this question is (d) All of the above.

        You’re right, but so are the other two options! Indeed, ETFs bring together some excellent bene-fits including portfolio diversification and buying and selling during trading hours. That’s what makes them so different from ordinary mutual funds which are only traded once a day, after the close of market hours.

        You are right, but also wrong. Sure, ETFs bring to you a diversified basket of securities which make your portfolio stronger, but then they are also cost-efficient in buying gold and silver. And, unlike ordinary mutual funds, they can be traded on an exchange during normal trading hours too! So all the options are correct.

        You totally deserve a big pat on the back for this! You know ETFs in and out. Cost-efficient, tax-efficient, tradable during trading hours on exchanges and great for portfolio diversification… what more could an investor ask for? No wonder ETFs are gaining popularity so rapidly; they sure are a perfect bridge between mutual funds and exchange traded securities, don’t you agree?

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