Thursday, November 23, 2006

Index funds beat stock pickers

Bloomberg reports that the $14 billion iShares MSCI Emerging market index, the largest exchange traded fund (ETF) beat those that are actively managed.

Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index such as the Nifty. An ETF, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day, fluctuating with supply and demand.

It is important to remember that while ETFs attempt to replicate the return on
indexes, there is no guarantee that they will do so exactly. By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock. Because, ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade.

There are various ETFs available in India, such as:

NIFTY BeES: An ETF launched by Benchmark Mutual Fund in January 2002.

Junior BeES: An ETF on CNX Nifty Junior,launched by Benchmark MF in Feb, 2003.

SUNDER: An Exchange Traded Fund launched by UTI in July 2003.

Liquid BeES: An Exchange Traded Fund launched by Benchmark Mutual Fund in July 2003.

Bank BeES: An ETF launched by Benchmark Mutual Fund in May 2004.

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