Here’s why ETFs are helping a big deal with disinvestments

Here’s why ETFs are helping a big deal with disinvestments

News:

The government is increasingly using the exchange-traded fund (ETF) route for disinvestment.

Important Facts:

About Exchange Traded Fund:

• Exchange Traded Funds (ETFs) are mutual funds listed and traded on stock exchanges like shares.
• Index ETFs are created by institutional investors swapping shares in an index basket, for units in the fund. Usually, ETFs are passive funds where the fund manager doesn’t select stocks on your behalf. Instead, the ETF simply copies an index and endeavors to accurately reflect its performance.
• In an ETF, one can buy and sell units at prevailing market price on a real time basis during market hours.
• They are a basket of stocks with assigned weights that reflects the composition of an index
• The Bharat 22 ETF allows the Government to park its holdings in selected PSUs in an ETF and raise disinvestment money from investors at one go.
• ETF, Bharat 22 is a well-Diversified portfolio with 6 sectors (Basic Materials, Energy, Finance, FMCG, Industrials & Utilities)
• The ETF is aimed at helping speed up the government’s disinvestment programme.

Benefits of ETF

• Low Cost – Unlike traditional mutual and index funds, ETFs have no front- or back-end loads. In addition, because they are not actively managed, most ETFs have minimal expense ratios, making them much more affordable than most other diversified investment vehicles.
• Liquidity – Whereas traditional mutual funds are only priced at the end of the day, ETFs can be bought and sold at any time throughout the trading day
• Tax-Advantages – In a traditional mutual fund, managers are typically forced to sell off portfolio assets in order to meet redemptions. Often, this act triggers capital gains taxes, to which all shareholders are exposed. By contrast, the buying and selling of shares on the open market has no impact on an ETF’s tax liability
• While IPOs and stake sales depend on market conditions and investor appetite, exchange-traded funds allow the government to lower its holding in public sector companies without being concerned about the volatility in the market

How ETFs Helped Government’s Divestment Goals

• The government has raised Rs 48, 325 Crores through divestment since April 2016
• Offloading shares of state-run companies to investors through ETFs has been the second-biggest contributor to the proceeds, behind initial public offers and strategic sales
• The contribution of ETFs has been steadily increasing in disinvestment receipts
• The Government raised 17,000 Cr from its last ETF issue, which had a base issue size of Rs 8000

Why there is increasing demand for ETF

• Discounts – The portfolio of stocks that make up the fund have been offered at a discount ranging between 3% and 5%, with most offers ending up at the higher end of the range. This offers large investors an easy arbitrage trade, which is to apply for the ETFs on offer and sell derivatives in the secondary markets

Although exchange-traded funds offer several advantages over traditional mutual funds, they also have distinct disadvantages.

• The securities that an ETF tracks are largely fixed, so investors that prefer active management will probably find ETFs wholly unsuitable.
• Since ETFs are traded as stocks, each ETF purchase will be charged a brokerage commission
• PSUs suffer from constant government intervention in their business and pricing decisions which can have serious impact on returns on investment.