What are ETFs and how to buy popular U.S. ETFs in India?
March 18 2022 - Team Stockal
Understanding Exchange Traded Funds (ETFs)
The financial markets across nations have seen an impeccable rally since the pandemic lows until the correction started in the final quarter of 2021. From lows to all-time highs, investors have gained hefty returns from stock market investments. However, amateur investors who only invested in the cash market rode the trend so far with joy until correction began. Now that news about inflation reaching a 40-year high, and geopolitical tensions between Russia and Ukraine are doing the rounds, investors are now switching to diversification. The U.S. ETFs are a great option for investors aiming to mitigate risk to their portfolios.
The U.S. ETFs have received record inflows in 2021 and if you’re you wondering how to invest in U.S. ETFs from India, then worry not! We’ve got you covered in this blog. But before we begin with that, let’s understand what are ETFs.
Understanding Exchange Traded Funds (ETFs)
As the name suggests, ETFs are funds that can be freely traded on the stock exchange just like stocks. This financial instrument was developed keeping in mind the diversity of mutual funds and liquidity of stocks, and hence, is considered to be an asset class that offers the best of both worlds. The price of ETFs changes throughout the trading session similar to shares, allowing an investor to freely buy or sell at any time during the normal trading hours.
An ETF can invest in many kinds of underlying assets such as stocks, bonds, commodities, or a mix of all of the aforementioned. An ETF can either hold shares of hundreds of diversified companies or hold a few shares from one particular sector or industry. Based on the investment in underlying assets, the U.S. ETFs are divided into two categories – Passive ETFs and Active ETFs.
Passive U.S. ETFs
Rather than trying to chase returns higher than the benchmark, passive ETFs merely try to replicate the return of broader indexes such as the S&P 500 or the returns of a specific sector or industry. Some of the best passively managed ETFs of the U.S. that you can invest in from India are iShare Core S&P 500 ETF, Vanguard Total Stock Market ETF, and Vanguard Long-Term Corporate Bond ETF, to name a few. Recent trends indicate that a higher number of investors in the United States are moving towards passively managed funds.
Active U.S. ETFs
In case of actively managed ETFs, the fund managers are involved in the active buying and selling of investments within the fund with the intention to outperform the benchmark index. These ETFs are considered slightly riskier compared to the passively managed funds and thereby offer a higher return. Some of the popularly traded active ETFs in the U.S. are SPDR Blackstone Senior Loan ETF, Invesco Optimum Yield Diversified Commodity Strategy K1 ETF, and iShares U.S. Trust ETF, to name a few.
Popular U.S. ETFs and their performance
Some of the largest and most popular ETF providers in the U.S. are Blackrock Financial Management, Vanguard, State Street Global Advisors, Invesco, JP Morgan Chase, etc. Let’s look at the statistical data of the top 10 widely traded U.S. ETFs along with their asset under management (AUM) and average daily volume.
(Source: ETF Database)
The data provided above has been curated from the ETF database and indicates the figures as on March 1, 2022.
How to invest in a U.S. ETF from India?
Investing in U.S. ETFs from India is permitted as the Reserve Bank of India (RBI) allows Indian investors to invest in U.S. stocks and funds under the Liberalized Remittance Scheme (LRS). Initially, Indians who wished to invest or send money to the U.S. were required to take permission from the RBI which was again a cumbersome process. But in 2004, the RBI launched the LRS which allows individuals to send money without any obstacles. Since the launch of this scheme, U.S. stock markets have attracted an increased number of Indian investors who are looking for superior returns.
So how do you invest in U.S. ETFs? Well, one way to invest in the U.S. ETFs is through indirect mode whereby you can invest in an Indian fund that in turn invests in the U.S. stock market. But a simpler way to do so is to directly open a U.S. brokerage account with Stockal that offers a unique investment platform with no account minimums. There is no lower limit on how much you can invest and the brokerage charges are reasonable too. You can simply decide the amount you want to invest and buy or sell the ETFs. With Stockal’s global investing account, the LRS compliance is made extremely easy. With a few simple clicks, you can complete your e-KYC procedure and become a U.S. stock market investor from India.
Is investing in U.S. ETFs beneficial?
Investing in U.S. ETFs from India comes with the added advantage of diversification as well as flexibility. Here are some of the benefits of investing in this asset class over other investment types.
- Affordable: ETFs are more cost-efficient than mutual funds. The lower expenses and long-term advantages of these instruments make them very affordable and an excellent choice for investors.
- Low Risk: Since an investment in most of the exchange-traded funds is passively managed, they are considered less risky. By focusing on investing only in the best stocks within the index, it reduces the probability of higher risks.
- Flexible: You can buy and sell the U.S. ETFs at any time during the normal trading hours of the American stock markets. As and when your target is achieved, you can simply place and sell orders and liquidate your investment.
- Diversification: Since multiple underlying assets are involved in the ETFs, the risk of one particular asset is absorbed by the other, thereby reducing the risk and optimising the returns. However, it is important to note that the risk is not completely mitigated with diversification.
To sum it up
For global investors, investing in U.S. ETFs is a good way to diversify their investment portfolio. With larger sums switching towards the passively managed exchange-traded funds, you can invest in the American stock market through this route and optimize your investment portfolio. Stockal provides you with a highly useful and intuitive global investment platform that will be your smart companion as it offers world-class research to you. To begin your global investing journey, download the Stockal app from iOS App Store or Google Play store.
To learn more, you can visit Stockal’s website here.