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Speaking at the Cafemutual Passives Confrence 2025, Anubhav Srivastava, Managing Partner, Aryzen Capital Advisors LLP, shared valuable insights for MFDs on how they can deal with ETFs.
Anubhav advised the MFDs to understand the inner-workings or the backend process of the ETFs as it effects the prices at which they are traded in the market.
Here are some of the key insights that he shared:
Evolution of ETFs
Anubhav said, since mid-1990s, the ETFs have evolved into a significant force across the world. The main reason behind the evolution of ETFs is their underlying structure.
ETFs are the combination of mutual funds and stocks both as they come with the mutual fund structure and also offer the tradability like stocks.
Just like mutual funds, ETFs are open-ended, have NAV declarations and are managed by AMCs. On the other hand, similar to stocks, they are listed on the exchange and are traded on real time basis.
ETFs also offer intraday liquidity, transparency and low-cost diversification. Furthermore, ETF units can be created or redeemed as per the demand in the market, specially in bulk, making them unique and stand apart from stocks or traditional mutual fund units.
Myths around ETFs
Anubhav said, generally it is believed that the ETFs do not have the desirable level of liquidity and their liquidity is determined based on the trading volume of a given ETF while in reality, the real liquidity of an ETF is determined by the liquidity of the underlying basket of the ETF.
The MFDs should understand that the high trading volume of an ETF may not necessarily result in high liquidity in the market. For example, a large cap ETF may be more liquid than a small cap ETF even if they both have the same trading volume in the market.
Liquidity sources of the ETFs
Normal market trading including various buy and sell orders from clients is one of the primary sources of liquidity for a given ETF.
Apart from that, the liquidity of the ET also depends on the creation and redemption of units by the authorized participants (APs). The APs can deliver securities to the AMCs for new ETF units and redeem the existing units by receiving the securities from the AMCs.
Practical execution tips
- Never ever use market order, instead, use limit order because you can never know the prevailing premium or discount in the given market conditions
- iNAVs of the ETFs are the snapshot according to the prevailing conditions
- While selecting the ETF, focus on the liquidity of the underlying asset rather than just the trading volume
- Beware of mispricing, always try to determine fair value of the units
Concluding his session, Anubhav said that ETFs are powerful, flexible and efficient investment vehicles but before venturing in this space, you must understand what you are dealing with.
