Updated on March 17, 2023
Equity ETFs are index-based passive investment schemes which invest in stocks of companies in the same proportion as the underlying index which the ETF is tracking. These ETFs aim to replicate and track benchmark indices such as S&P BSE Sensex, Nifty 50, Nifty IT, Nifty 100 etc. Equity Exchange Traded Funds have a lower expense ratio than mutual funds due to their structure and portfolio construction strategy.
Advantages of Equity ETFs
Some advantages of Equity Exchange Traded Funds are:
1. Equity exchange-traded funds are listed on the stock market and can be bought and sold like shares during market hours.
2. Equity ETFs are passively managed schemes and the fund management costs are lower.
3. Equity ETF investments are less volatile than stocks because fluctuation in some underlying stocks is taken care of by stability or price rise in others.
4. Equity ETFs offer a diversified investment portfolio providing a diverse set of stocks from a range of choices.
5. These ETFs reduce any Fund Manager bias or risk of poor selection.
Disadvantages of Equity ETFs
Disadvantages of Equity ETFs are:
a) Investors might indulge in frequent trading due to the flexibility offered and the daily fluctuation in ETF prices.
b) There are several costs involved like that of Demat account management, brokerage and trading fees.
c) There will be a difference or variation between the Index and Equity ETF return due to the tracking error.