What is an ETF and how it functions

Published On: November 01, 2020

An Exchange Traded Fund (ETF) is an investment instrument that combines the tradability of shares with the investment attributes of an open-ended mutual fund. In essence, an ETF is a tradable fund that has the risk and return characteristics of a portfolio of shares whilst having the diversity inherent in a mutual fund. An ETF holds a basket of securities (e.g. stocks) that generally tracks an underlying index. Globally, ETFs are a popular and accessible source of investment for investors, be it a savvy investor or a novice investor.

ETFs are a cost effective source of investment with lower management fees in comparison to mutual funds. ETFs can be bought and sold at current market prices over the course of a trading day and can also be bought or sold against limit orders and stop loss orders. For investors new to stock exchange, it is important to mention that ETFs trade just like shares. In order to invest in an ETF, a customer must engage a brokerage firm to open a brokerage account. Current stock market investors can readily buy/sell ETFs from their existing brokerage account. The process and transactions thereof for investing in an ETF are the same as in shares so much so that even short selling is possible in ETFs, as per Exchange rules. Indeed, brokerage costs and commission are also charged in ETFs as in shares trading. Capital gain and dividends is obviously possible in ETFs.

Pakistan Stock Exchange has launched its first two ETFs on March 24, 2020, namely the UBL Pakistan Enterprise ETF (UBLP-ETF) and the NIT Pakistan Gateway ETF (NITG-ETF). The former fund has been offered by UBL Fund Managers whereas the latter has been offered by NIT

The investment strategy of UBL Pakistan Enterprise ETF is to provide long term capital appreciation and dividend yield to investors. The fund aims to track 9 companies with highest free float market capitalization of KSE 100 Index (excluding Oil & Gas related sectors) constituting the Benchmark UPP9 Index (UBL PSX Pakistan Enterprise Index). UBLP-ETF is traded on PSX and it can be tracked on the PSX data portal at:The Term Sheet of the ETF is also available therein. The details of the underlying Benchmark Index UPP9 can be accessed here:

The UBLP-ETF is an investment instrument with high return and risk potential for investors. An advantage for investors in investing in this ETF is that the underlying basket of securities doesn’t contain the highly volatile oil & gas stocks and comprises of a diversified collection of stock picks with highest free float market capitalization of KSE 100 Index. The stock picks include those from the banking, fertilizer, cement, and power sectors. Further details of UBLP-ETF are available at its website*: www.ublfunds.com.pk/individual/products-services/ubl-pakistan-enterprise-etf/

The investment strategy of NIT Pakistan Gateway ETF (NITG-ETF) aims to track the underlying NIT Pakistan Gateway Index (NITPGI). The ETF includes the largest stocks forming part of the KSE 100 Index so as to cover atleast 50% of the total market capitalization of the KSE 100 Index at all times. The NITG-ETF is traded on PSX and it can be tracked on the PSX data portal at:Term Sheet of the ETF is also available therein. The underlying index (NITPGI) can be accessed here:

The NITG-ETF is an investment instrument with high return and risk potential for investors. Currently, it includes 12 stocks from the banking, fertilizer, oil & gas, cement, and power sectors. Further details of NITG-ETF are available at its website*:

The Indicative NAV (iNAV) of both the ETFs is updated every 15 seconds whereas the NAV (assets minus liabilities on a per unit basis) of the ETFs is also published daily after close of the stock market for investors to gauge the underlying value of their holdings.

Before investing in an ETF, it is important to read the Fund Document(s) namely the Offering Document and Trust Deed provided by the fund manager available at the website of the respective AMCs*. In order to invest in an ETF, it is necessary to have a brokerage account. The list of brokerage firms is available on the PSX website for investors to select the suitable brokerage firm for themselves. Once their brokerage account is opened, investors can invest in ETFs by calling their respective brokers to trade in ETFs for them or the investors can do so directly if the online trading software is provided to them by their selected brokerage firms

10,000/-, an investor can take an entry position in ETFs. This will allow the investor to have a risk mitigated diversified portfolio in the shape of an ETF which acts like a stock while having the characteristics of an open-ended mutual fund. An ETF can be purchased in a lot of 500 units in the regular market or even one unit can be purchased in the odd lot market. With this easy and cost-effective way of having a diversified portfolio of securities, Pakistan Stock Exchange wishes its investors all the best and happy investing in ETFs!

Disclaimer:

The contents of this article comprising of information pertaining to financial products, including but not limited to securities, derivatives products, listed companies or companies proposed to be listed on PSX and any content of third parties are strictly of a general nature and are provided for informative and educational purposes only. Such content/ information is not intended to provide trading or investment advice of any form or kind and shall not under any circumstances be construed as providing any recommendation, opinion or indication by PSX as to the merits of the said product, security or company and also not be interpreted as comprehensive and interpretive of all applicable regulatory provisions