Explore the booming world of ETFs and their contrasting popularity in the U.S. versus India. Discover why passive investing is thriving in one market but hasn't caught on in the other. The discussion dives into the mechanics of ETFs, pricing dynamics, and the pivotal role of market makers. Learn about the tax advantages, operational differences, and potential long-term benefits of ETFs over mutual funds. Plus, uncover the reasons behind underperformance in India's ETF market and the complexities of trading strategies.
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insights INSIGHT
ETF Market Size Comparison
US ETFs hold $10 trillion, while mutual funds have $30 trillion.
India's entire mutual fund market is worth $750 billion, with ETFs at $105 billion, mainly from EPFO.
insights INSIGHT
US Tax Arbitrage
US mutual funds face tax arbitrage, passing capital gains taxes to shareholders.
This contrasts with ETFs, which exchange stock for units, avoiding intermediate transaction taxes.
insights INSIGHT
ETF Mechanics
ETFs operate by exchanging stocks for units, not cash.
This structure avoids capital gains taxes, unlike mutual funds which buy and sell stocks directly.
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ETFs have taken over the world, or at least that’s what you’d believe if you spent any time reading financial media in the US. Passive investing! Low costs! No fund manager egos! And of course, that looming prediction: “ETFs will destroy price discovery!”
But in India? Crickets. While ETFs have become mainstream in the US, with trillions of dollars flowing into passive investing strategies, India's ETF story is still unfolding. Why haven’t ETFs exploded in India despite our obsession with stocks? And more importantly, should you be investing in ETFs or mutual funds?
In this episode, Deepak and Shray get into the weeds on all things Exchange Traded Funds — what they are, how they work, where they don’t work, and why, despite sounding like the next great revolution in investing, they haven’t quite clicked here yet.
00:00:00 - Introduction 00:02:01 - How big are ETFs? 00:07:30 - Why are ETFs so successful in the US 00:09:42 - How do ETFs work? 00:13:52 - Isn’t it better to move into ETFs then? 00:16:01 - Who are you buying the ETF from? 00:20:08 - Are there any advantages in ETFs over MFs in India? 00:25:10 - What role do Market Makers play in ETFs? 00:30:12 - When and why do ETF prices trade above their NAV? 00:39:14 - Role of liquidity in ETF prices 00:42:06 - Why don’t people do SIPs into ETFs and Stocks? 00:48:44 - How are ETFs useful for investors? 00:53:17 - What about Commodity ETFs? 00:55:47 - What about Liquid ETFs? 00:59:52 - How do regulations like stock-lending and free-float impact ETF returns? 01:04:53 - What are Deepak’s thoughts about Active ETFs? 01:07:06 - Will ETFs gain market share from Mutual Funds?