What Is Liquid ETF?

Before reinvesting his money in a new stock, a stock market investor must first liquidate or sell off his investment.

Let’s pretend you’re a stock market investor. Your investment in Stock A has appreciated in value over the last few months, and you are now selling it to profit. On the first day, you put your sell order. On day 2, your Demat account is debited, and on day 3, you receive your sale proceeds in your margin account.

You can now keep the funds in your margin account until you find a new investment or initiate a bank account payment.

As a stock market investor, your initial concern will be that this money will sit in your margin account, earning no interest and hence providing no returns. Second, you’ll have to devote a significant amount of time and effort to transferring funds between your trading account and your bank account.

Is there a single, straightforward answer to each of these problems? There is, of course!

Liquid ETFs are a new type of exchange-traded fund. A liquid ETF, or Exchange Traded Fund, is a mutual fund whose units are traded on the stock exchange, as the name implies. They put their money into low-risk overnight securities such as Collateralized Borrowing and Lending Obligations (CBLO), Repo, and Reverse Repo.

CBLO, on the other hand, is a money market instrument that allows companies to borrow and lend against sovereign collateral. The maturity spans from one day to ninety days, with the option of making it available for up to a year. T-bills and other central government securities are among the instruments that can be used as collateral for borrowing through the CBLO.

Repurchase arrangements in the form of short-term borrowing for dealers in government securities are referred to as repo. The dealer offers government assets to investors and then buys them back the next day, generally overnight.

It is a repo if the party selling the security agrees to repurchase it in the future. It’s a reverse repurchase agreement, or Reverse Repo, for the party buying the securities and promising to sell it in the future.

Liquid ETFs provide daily dividends, which are subsequently re-invested in the fund. A liquid ETF’s goal is to produce an income that is proportionate with minimal risk while also delivering a high level of liquidity.

Liquid ETFs are the ideal solution to your problem because of their great liquidity.

On the same day that you make your sell order, you can also place a buy order for Liquid ETF units. Your stocks will be debited from your demat account on Day 2, and the Liquid ETFs will be credited to your demat account on Day 3, and you will begin earning daily dividends. As a result, no funds will be idle. This essentially permits liquid ETF investors to begin getting rewards on their investments as soon as their trade is settled.

Furthermore, because liquid ETFs are very liquid, you can simply sell units to reinvest in the stock market when the chance arises.

  • Help earn more returns: Rather than sitting idle in a margin account or generating low to no returns in a savings account, your money is collecting interest all the time. Furthermore, liquid ETFs begin paying returns as soon as the trade is settled, avoiding days of missed returns.
  • It’s very liquid, so you’ll be able to invest as soon as you come across an appealing investing opportunity. Liquid ETFs can be purchased and sold both on the open market and through the issuing Mutual Fund.
  • Investors no longer need to make extra transactions or transfer money between their trading account and their bank account, which saves time and effort. Liquid ETFs also save time by eliminating the need to wait for checks to clear or make electronic transfers to a trading account.
  • Can be used for margin: It takes three days to complete a trade when buying or selling equities. Some traders hold some margin with their brokers to avoid the hassle of submitting checks or making electronic transfers every time. This margin (money) does not, however, yield any returns. You could buy Liquid ETF units worth the margin you want to keep and earn returns until you’re ready to buy stocks.
  • Returns that are tax-free: Dividends earned from liquid ETF investments are tax-free in your hands. The fund house deducts the applicable Dividend Distribution Tax, and as these aren’t equity funds, the Securities Transaction Tax (STT) isn’t applicable.
  • Fractional units: Liquid ETFs provide returns in terms of unit increases, which can be used to add small fractions to existing holdings; fractional units cannot be traded on the Exchanges. The issuing mutual fund (MF) firm, on the other hand, buys back the fractional units.
  • Brokerage fees: When purchasing Liquid ETF units, investors may be required to pay brokerage fees. Brokerage fees vary by broker. Most brokers may not levy a commission on the acquisition of these securities, making them more appealing to investors. Before placing a purchase in Liquid ETF, investors should confirm the brokerage fees that will be paid on their trades. Furthermore, liquid ETFs are not only easy to buy and hold, but they are also lot faster than moving money between your bank and your broker.

Large retail traders and investors, Portfolio Management Services (PMS) providers, Futures & Options (F&O) brokers, and institutions that invest directly in equities will benefit from liquid ETFs. These funds are also well-suited to the demands of High Net Worth Individuals (HNIs), as many of these investors may have cash sitting idle in a trading account or margin money with their brokers on which they are not earning any returns. Investors can receive returns on idle assets while remaining liquid enough to take advantage of favorable investing opportunities by parking funds in liquid ETFs.

To summarize, if used correctly, liquid ETFs can help make trading more successful. And all of this in a far more simple and convenient manner!

How can you determine whether an ETF is liquid?

For a variety of reasons, domestic securities are more liquid than foreign assets:

  • Different trading laws and regulations govern foreign exchanges and the countries in which they are based, affecting liquidity.
  • Because most international equities are held through American depositary receipts (ADRs), which are securities that invest in the securities of foreign businesses rather than the actual foreign securities, ETFs that invest in ADRs have lower liquidity than ETFs that do not.

The size of the exchange where the ETF’s securities are traded also matters. ETFs that invest in assets that trade on large, well-known exchanges are more liquid than ETFs that do not.

What are the most liquid ETFs?

ETFs (exchange-traded funds) provide a simple solution for investors to purchase a single security whose performance is based on a much broader portfolio of securities. The basket is usually built to track the performance of an underlying index, such as the S&P 500. Similarly, leveraged ETFs offer investors a single investment instrument that represents a diverse range of securities.

These leveraged ETFs, on the other hand, are far more complicated than standard ETFs, and they tend to focus their assets mainly on debt and financial derivatives, such as swaps, in order to boost the returns on the index they monitor. Many of these ETFs have been popular among investors in recent months as a way to profit from market volatility caused by the COVID-19 outbreak and related disruptions in the global and US economies.

Is Vanguard ETF a liquid investment?

  • Vanguard manages and trades a massive quantity of funds and equities, making their funds among of the most liquid on the market.
  • When the fund rebalances and recalculates its net asset value, or NAV, at the end of the trading day, all buy and sell orders are executed.
  • Mutual funds will never be as liquid as stocks or exchange-traded funds (ETFs). Vanguard’s funds, on the other hand, are extremely liquid.

Is a liquid fund better than a fixed-income investment?

As a result, liquid funds provide superior liquidity at lower penalty rates than FDs. A fixed deposit can be held for a period ranging from seven days to ten years. Liquid cash can be held for up to 91 days.

Is liquid beekeeping risk-free?

This is a money market ETF that only invests in the overnight money market. It has a very high level of safety and liquidity as a result of this. Because the money market maintains money for a very short time (overnight or ultra-short term), it is safe, and the RBI monitors it to guarantee there are no repayment or liquidity issues.

  • At 1000 rupees per share, you purchase LiquidBees. Never use a market order; instead, use a limit order of Rs. 1000.
  • The LiquidBees ETF pays a dividend on whatever interest it collects every day, bringing the NAV back to Rs. 1000. So, if the money market pays them 0.1 percent interest, the NAV will rise from Rs. 1000 to Rs. 1001. (Rs.1 is 0.1 percent of 1000). They will pay a dividend of Rs. 1 to bring the NAV back to Rs. 1000.
  • Now that the payout is subject to Dividend Distribution Tax, they will pay the government Rs. 0.3 (30%) and send you Rs. 0.7 as a dividend.
  • You will have Rs. 500,000 worth of Liquid Bees in your account if you have 500 units (purchased at Rs. 1000 each). You will receive Rs. 350 as a dividend if you receive Rs. 1 as a dividend, which is Rs. 0.7 after taxes. Assume this is reinvested at Rs. 1000 per unit, which means you will receive an additional Rs. 0.35 unit in your account.
  • Because ETFs are mutual funds, fractional units are possible. However, you will only be able to sell whole units on the exchange, therefore you will have to wait till the additional units reach 1 unit or more. In our case, you will receive one additional unit three days after receiving the 0.35 units. (Actually 1.05 units, but you can only sell one because of the math.)

So, what makes this so good? Because the brokerage company pays you no interest if you keep cash with them. So you might as well purchase LiquidBees to generate some interest where none previously existed. This is a simple approach to generate interest while “parking” money with the brokerage.

When you buy a stock through a broker like Zerodha, you pay no brokerage and only a demat fee of Rs. 15 per day when you sell it. Because of the low cost of entrance, you can keep huge amounts of money in LiquidBees while waiting for opportunities to use it.

You may sell the LiquidBees to buy stocks, and most brokers enable you to buy and sell on the same day, so you can buy your stocks on the same day.

LiquidBees has an extremely low risk profile because they only invest in overnight investments. There’s a lot you can do with it, too!

Are exchange-traded funds (ETFs) safer than stocks?

Exchange-traded funds, like stocks, carry risk. While they are generally considered to be safer investments, some may provide higher-than-average returns, while others may not. It often depends on the fund’s sector or industry of focus, as well as the companies it holds.

Stocks can, and frequently do, exhibit greater volatility as a result of the economy, world events, and the corporation that issued the stock.

ETFs and stocks are similar in that they can be high-, moderate-, or low-risk investments depending on the assets held in the fund and their risk. Your personal risk tolerance might play a large role in determining which option is best for you. Both charge fees, are taxed, and generate revenue streams.

Every investment decision should be based on the individual’s risk tolerance, as well as their investment goals and methods. What is appropriate for one investor might not be appropriate for another. As you research your assets, keep these basic distinctions and similarities in mind.

Are ETFs suitable for novice investors?

Because of their many advantages, such as low expense ratios, ample liquidity, a wide range of investment options, diversification, and a low investment threshold, exchange traded funds (ETFs) are perfect for new investors. ETFs are also ideal vehicles for a variety of trading and investment strategies employed by beginner traders and investors because of these characteristics. The seven finest ETF trading methods for novices, in no particular order, are listed below.

Can I sell ETF whenever I want?

ETFs are popular among financial advisors, but they are not suitable for all situations.

ETFs, like mutual funds, aggregate investor assets and acquire stocks or bonds based on a fundamental strategy defined at the time the ETF is established. ETFs, on the other hand, trade like stocks and can be bought or sold at any moment during the trading day. Mutual funds are bought and sold at the end of the day at the price, or net asset value (NAV), determined by the closing prices of the fund’s stocks and bonds.

ETFs can be sold short since they trade like stocks, allowing investors to benefit if the price of the ETF falls rather than rises. Many ETFs also contain linked options contracts, which allow investors to control a large number of shares for a lower cost than if they held them outright. Mutual funds do not allow short selling or option trading.

Because of this distinction, ETFs are preferable for day traders who wager on short-term price fluctuations in entire market sectors. These characteristics are unimportant to long-term investors.

The majority of ETFs, like index mutual funds, are index-style investments. That is, the ETF merely buys and holds stocks or bonds in a market index such as the S&P 500 stock index or the Dow Jones Industrial Average. As a result, investors know exactly which securities their fund owns, and they get returns that are comparable to the underlying index. If the S&P 500 rises 10%, your SPDR S&P 500 Index ETF (SPY) will rise 10%, less a modest fee. Many investors like index funds because they are not reliant on the skills of a fund manager who may lose his or her touch, retire, or quit at any time.

While the vast majority of ETFs are index investments, mutual funds, both indexed and actively managed, employ analysts and managers to look for stocks or bonds that will yield alpha—returns that are higher than the market average.

So investors must decide between two options: actively managed funds or indexed funds. Are ETFs better than mutual funds if they prefer indexed ones?

Many studies have demonstrated that most active managers fail to outperform their comparable index funds and ETFs over time, owing to the difficulty of selecting market-beating stocks. In order to pay for all of the work, managed funds must charge higher fees, or “expense ratios.” Annual charges on many managed funds range from 1.3 percent to 1.5 percent of the fund’s assets. The Vanguard 500 Index Fund (VFINX), on the other hand, costs only 0.17 percent. The SPDR S&P 500 Index ETF, on the other hand, has a yield of just 0.09 percent.

“Taking costs and taxes into account, active management does not beat indexed products over the long term,” said Russell D. Francis, an advisor with Portland Fixed Income Specialists in Beaverton, Ore.

Only if the returns (after costs) outperform comparable index products is active management worth paying for. And the investor must believe the active management won due to competence rather than luck.

“Looking at the track record of the managers is an easy method to address this question,” said Matthew Reiner, a financial advisor at Capital Investment Advisors of Atlanta. “Have they been able to consistently exceed the index? Not only for a year, but for three, five, or ten?”

When looking at that track record, make sure the long-term average isn’t distorted by just one or two exceptional years, as surges are frequently attributable to pure chance, said Stephen Craffen, a partner at Stonegate Wealth Management in Fair Lawn, NJ.

In fringe markets, where there is little trade and a scarcity of experts and investors, some financial advisors feel that active management can outperform indexing.

“I believe that active management may be useful in some sections of the market,” Reiner added, citing international bonds as an example. For high-yield bonds, overseas stocks, and small-company stocks, others prefer active management.

Active management can be especially beneficial with bond funds, according to Christopher J. Cordaro, an advisor at RegentAtlantic in Morristown, N.J.

“Active bond managers can avoid overheated sectors of the bond market,” he said. “They can lessen interest rate risk by shortening maturities.” This is the risk that older bonds with low yields will lose value if newer bonds offer higher returns, which is a common concern nowadays.

Because so much is known about stocks and bonds that are heavily scrutinized, such as those in the S&P 500 or Dow, active managers have a considerably harder time finding bargains.

Because the foundation of a small investor’s portfolio is often invested in frequently traded, well-known securities, many experts recommend index investments as the core.

Because indexed products are buy-and-hold, they don’t sell many of their money-making holdings, they’re especially good in taxable accounts. This keeps annual “capital gains distributions,” which are payments made to investors at the end of the year, to a bare minimum. Actively managed funds can have substantial payments, which generate annual capital gains taxes, because they sell a lot in order to find the “latest, greatest” stock holdings.

ETFs have gone into some extremely narrowly defined markets in recent years, such as very small equities, international stocks, and foreign bonds. While proponents believe that bargains can be found in obscure markets, ETFs in thinly traded markets can suffer from “tracking error,” which occurs when the ETF price does not accurately reflect the value of the assets it owns, according to George Kiraly of LodeStar Advisory Group in Short Hills, N.J.

“Tracking major, liquid indices like the S&P 500 is relatively easy, and tracking error for those ETFs is basically negligible,” he noted.

As a result, if you see significant differences in an ETF’s net asset value and price, you might want to consider a comparable index mutual fund. This information is available on Morningstar’s ETF pages.)

The broker’s commission you pay with every purchase and sale is the major problem in the ETF vs. traditional mutual fund debate. Loads, or upfront sales commissions, are common in actively managed mutual funds, and can range from 3% to 5% of the investment. With a 5% load, the fund would have to make a considerable profit before the investor could break even.

When employed with specific investing techniques, ETFs, on the other hand, can build up costs. Even if the costs were only $8 or $10 each at a deep-discount online brokerage, if you were using a dollar-cost averaging approach to lessen the risk of investing during a huge market swing—say, investing $200 a month—those commissions would mount up. When you withdraw money in retirement, you’ll also have to pay commissions, though you can reduce this by withdrawing more money on fewer times.

“ETFs don’t function well for a dollar-cost averaging scheme because of transaction fees,” Kiraly added.

ETF costs are generally lower. Moreover, whereas index mutual funds pay small yearly distributions and have low taxes, equivalent ETFs pay even smaller payouts.

As a result, if you want to invest a substantial sum of money in one go, an ETF may be the better option. The index mutual fund may be a preferable alternative for monthly investing in small amounts.