Introduction:
The mutual fund has attracted considerable interests in recent years. Considering the complexity and the risks involved of dealing with financial assets, mutual fund provides a setting, which enables investors to access a professionally managed and diversified portfolio including shares, bonds and other financial assets. As such, the performance of fund relies on various factors which are: the performance of portfolio managers, the performance of underlying shares, bonds and other financial assets included in the portfolio. Further, each shareholder participates proportionally in the gain or loss of the fund.
One of the most innovative mutual funds is Exchange Traded Funds (ETF). ETFs track an index, a commodity, bonds or baskets of assets like an index fund. While mutual funds are not tradable, ETF trades similar to a share on stock exchange during the market hours. As such, ETF prices tend to change during the trading hours. Given that ETFs offer a wide variety of investment choices, it is a great investment option for investors with limited knowledge about different types of financial markets. Nevertheless, the investment structure of ETF varies country by country. This article provides an introductory insight into the ETF market in Iran.
A relative comparison of ETFs and Mutual funds in Iran:
- While NAV for ETF is updated every 2 minutes during the trading hours, mutual funds trade based on their net asset value(NAV) prices of the next day.
- Unlike mutual funds, there is no limitation on the minimum investment required for ETFs.
- While it takes one to three working days for settlement of ETFs, it takes minimum 7 working days for mutual funds to settle.
Types of ETFs in Iran:
This section provides an insight into the various types of ETFs in Iran market.
- Equity ETFs:
The equity based ETFs is comprised of companies included in the Tehran Stock Exchange (TSE). These equity ETFs invest 70%-90% of the proportion of the underlying assets in stocks and 10%-30% allocated to alternative income sources. These kind of ETFs are generally suitable for investors with a high-risk appetite. In the table below the information about existing equity ETFs has been shown:
In the graph below the performance of 3 mutual fund and also TSE Index has been shown. It is needed to consider that the reason for selecting these 3 funds out of 9 and comparing them with TSE index is life of them and they are the oldest equity fund in Iran.
- Fixed income ETFs:
These funds invest 90% of the underlying assets in fixed income assets and only 10% of the underlying assets in equities. Within short term, an investor is expected to gain 23% return on average per annum. Fixed income ETFs can provide investors with more reliable income stream and with minimum level of volatility. As such, these funds generally suit investors with low risk appetite. In the table below the information about existing fixed income funds has been shown:
The performance of one of the oldest fixed income fund and TSE Index has been shown in the graph below:
- Multi assets ETFs:
Multi assets ETFs includes fixed income securities (40%-60%) and equities (40%-60%). As such, these funds generally suit investors with moderate risk appetite. In the table below the information about existing multi assets funds has been shown:
The performance of 2 oldest multi assets fund and TSE Index has been shown in the graph below:
Conclusion:
Investors are generally risk averse and they require higher return when they are exposed to a higher level of risk. Perhaps the most attractive feature of ETFs for investors is diversification of the risks as ETFs tracks a wide range of financial assets including equities, bonds and commodities. In an emerging market such as Iran, ETFs provide an important setting for investors to easily access to the market. Given the high level of volatility observed in Iran’s equity market, foreign investors could invest in ETFs as a great instrument to access such a growing market.
