Characteristics of ETFs
Exchange Traded Funds (ETFs) have the following characteristics
- It can replicate any stock index, any popular bond index or any commodity price.
- The ETF units are tradable on the exchanges just like other common shares.
- It has more liquidity than the other close-end funds in the secondary market because of unique mechanism adopted by the fund management.
- Because of high liquidity the ETF units are traded near to its NAV without much discount or premium.
- As the NAV is almost near to the actual value of the shares there is always some arbitrage opportunities available to the investors.
- The unique redemption process generated capital gains for the fund management company, not for the individual investors.
- The Fund management company should disclose the NAV and the discount/premium related to the market value every day.
- It should disclose the cash reserves it is holding at any point of time.