ইটিএফ ETF

An ETF, an exchange traded fund, is a fund that copies an index, and whose units trade on the exchange like a share.

The idea began with a question somebody asked out loud in the 1970s: if fund managers on average do not beat the index, why are we paying their fees? Why not just buy the index? The funds born from that question are now the largest investment vehicles on earth.

Active and passive

An ordinary mutual fund manager decides: this company is good, that one is not, I will overweight this sector. That is active management, and it needs research staff and analysts, and their cost comes out of your return.

An ETF manager decides nothing. Whatever companies the index holds at whatever weights, they buy exactly that. No research is needed, so the fee is far lower. That is passive management.

Why low cost matters this much

This is the real argument, and the arithmetic is unforgiving.

If an active fund costs 2.5% a year and an ETF 0.5%, the gap is only 2%. But that 2% recurs every year and compounds. Over twenty years it can eat close to a third of the total outcome. And the cost is certain: good market or bad, the fee is taken.

The case for active management is that the manager earns back more than that 2%. Some do. Which ones cannot be known in advance, and over long stretches most do not, in nearly every market on earth.

How an ETF stays with its index

A fair question: if ETF units trade on an exchange, their price is set by supply and demand, so how do they stay near the index? Closed-end funds sit well below NAV for years.

The answer is a mechanism, and it is what separates an ETF from a closed-end fund. Large institutions are attached to an ETF and may create new units at will, or break units apart and take the underlying shares out. If the unit price drops below NAV they buy units cheaply, break them, sell the shares inside and pocket the difference; above NAV they do the reverse. That trading is what pulls the price back to NAV.

The mechanism is called creation and redemption, and it needs participants large and active enough to bother. Bangladesh's market is still small, so the pull is weak, which is the subject of the next section.

ETFs in Bangladesh

Honesty is required here: the ETF world in Bangladesh is still very small. A handful are listed and their daily turnover is often low enough that liquidity becomes a risk of its own.

So the practical advice is this: learn the idea, because it is one of the most important ideas in investing, and check daily turnover before buying. An ETF that trades two lakh taka a day is cheap in theory and impossible to leave in practice.

Check yourself