What is an ETF?
Like a mutual fund, an ETF pools many people’s money and invests it in shares, bonds or other assets. The difference is where you trade it. Units of an open-end mutual fund are bought from and sold back to the asset manager at the NAV worked out at the end of the day. ETF units trade on the stock exchange, through a BO account and a broker, at any moment while the market is open, at the market price of that moment.
Most ETFs follow an index, but not all. Some ETFs are actively managed: the manager makes the choices, and only the wrapper is an ETF. So the word “ETF” tells you how the fund is traded, not what it holds inside.
Imagine a mixed fruit basket sold at the bazar, holding mangoes, bananas and guavas in set proportions. Instead of bargaining for each fruit separately, you buy the whole basket at one price. And the basket changes hands between traders, its price set by buyers and sellers haggling. An ETF is a basket like that, traded on the stock exchange.
Why it matters to an investor
- Many companies in one trade: buying a single unit gives you a small share of everything the fund holds, without buying each share separately.
- Price and value can differ: the market price can be a little above or below the fund’s real value (NAV). What you are paying matters.
- Costs in two places: on top of the fund’s yearly costs you pay brokerage commission and the spread, as when trading shares.
- The risk is in what it holds: a share-based ETF rises and falls like the stock market. A modern wrapper does not reduce the risk.
Why the market price stays near NAV
Closed-end funds also trade on the exchange, but their number of units is fixed, so weak demand can push the price far below NAV. An ETF has an extra mechanism: certain approved large institutions (authorised participants) can hand the fund a basket of shares and receive newly created units, or hand units back and receive the basket.
When the ETF trades above NAV, they buy the basket, create new units and sell them on the market; the extra supply brings the price down. When it trades below NAV, they buy units cheaply and hand them back to the fund; supply shrinks and the price rises. This chance of profit pulls the price back towards NAV. In thinly traded markets or turbulent times, though, the gap can still be large.
ETFs in Bangladesh
Bangladesh’s ETF rules were made in 2017. In 2022 the DSE said BSEC had agreed in principle to ETFs investing mainly in the DS30 index, with a minimum fund size of Tk 50 crore. The country’s first ETF was approved in 2023, but it was actively managed rather than index-tracking.
As of July 2024 that ETF had not raised the required minimum from eligible investors, so its subscription period was extended several times. Reasons given included little understanding of the new product, a weak stock market and high rates on treasury bonds and FDRs. If a new ETF comes along, check the latest information from BSEC and the stock exchanges.
Worked example
- Say an ETF’s NAV is Tk 10 a unit, but sellers on the market are asking Tk 10.30. Buying 10,000 units costs Tk 1,03,000, while the assets inside are worth Tk 1,00,000. You have paid a 3% premium.
- At the same moment buyers are offering Tk 10.20. If you sold straight after buying, you would get Tk 1,02,000. That 10-paisa gap is the spread: Tk 1,000 gone, before brokerage commission.
- If the premium later disappears, the unit price can fall back towards Tk 10 even if the NAV has not moved.
Result: with an ETF you need to look not only at the fund’s costs but also at the gap between price and NAV and between buying and selling prices. Thinly traded ETFs usually have bigger gaps. The numbers are only an example.
Common mistakes
- Assuming every ETF tracks an index. Some ETFs are actively managed.
- Trading ETFs often because they trade like shares. Every trade costs brokerage and the spread.
- Treating the market price and the NAV as the same thing. The price can be above or below NAV.
- Thinking the word “ETF” means safe or risky. The risk depends on what the fund holds inside.
An ETF is a fund that trades like a share: look at what is inside, and when you buy, compare the price, the NAV and the spread.