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    ETFs And Bonds

    What is impact cost in ETFs?

    Impact cost in the invisible cost you pay for the lack of liquidity at your desired market price.  Let’s you want to buy 1 Cr units of gold ETF from the market. Let’s say the fair value of each Gold ETF is ₹10. When you place the order, your order will be matched against multiple sellers who want to sell their units. If the volume of sellers who want to sell at ₹10 is not enough then your order starts to execute with sellers at higher asking prices (say ₹10.10). By the time your order gets fully executed your average cost could be ₹10.7 per unit.

    Now what you should have paid = ₹10 x 1 Cr = ₹10 Cr

    What you actually paid = ₹10.7 x 1 Cr = ₹10. 7 Cr

    Here the difference of ₹0.7 Cr or ₹70 Lakhs is the hidden cost known as the impact cost (0.7%).

    This cost is not charged by the broker or AMC but is a purely market driven factor. Even when the ETF itself may have lower expense ratio or lower tracking error, impact cost can reduce your returns. This is especially true for frequent traders and large orders.

    ETFs with high impact cost:

    a. ETFs with low liquidity i.e. ETF where there are few buyers and sellers

    b. ETFs with large bid-ask spread

    What is the difference between Impact cost and Expense ratio? Where is the gold stored for Gold ETFs? Can I get physical gold by redeeming Gold ETF units? What is Smart Beta or Factor ETFs? Why can’t I invest in international or global ETFs? Can I pledge my ETF units to get a margin for trading? Can I sell ETFs using eATM? How are Debt ETFs taxed? What are Authorized Participants (APs)? How are ETFs different from Stocks and Mutual Funds? What is tracking error and tracking difference? What is an ETF unit? What are Equity ETFs? What are Index ETFs? What are Gold and Silver ETFs? How to reduce Impact Cost? What is Indicative Net Asset Value (iNAV)? What is Net Asset Value (NAV)? What are creation units? What is an Exchange-Traded Fund (ETF)? How are gold investments taxed at the time of purchase and sale across different forms? Do I need a Demat account to invest in ETFs? Can I setup a SIP in ETFs? What should I check before investing in ETFs?
    What is the share as margin haircut percent on the Sovereign Gold Bonds (SGBs)? What are the shares as margin haircut percent and maximum quantity pledge limit for the ETFs? What is difference between Sovereign Gold Bonds and Gold ETFs How many Sovereign Gold bonds are their with percentage SAM haircut ? What are Sovereign Gold Bonds (SGBs)? What is the tenure of SGBs? What is the interest rate on SGBs? Can SGBs be used as collateral for loans?