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Understanding ETFs Uses, Returns and Comparison with Mutual Funds and Stocks

 Exchange-Traded Funds (ETFs) have gained popularity among investors for their unique features and benefits. In this blog, we'll explore the uses of ETFs, their potential returns, how they differ from mutual funds and stock investments, and their safety profile. What is an ETF? An ETF is a type of investment fund that trades on stock exchanges, much like individual stocks. It holds a collection of assets, such as stocks, bonds, or commodities, and aims to track the performance of a specific index, sector, or asset class. Uses of ETFs Diversification : ETFs allow investors to gain exposure to a wide range of assets without having to purchase each individually. For instance, an ETF tracking the S&P 500 gives you exposure to 500 different stocks, reducing the risk associated with individual stock investments. Cost Efficiency : ETFs often have lower expense ratios compared to mutual funds. They typically pass on lower management costs to investors since they are often passively man
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RAROC (Risk Adjusted Return on Capital)

RAROC & Economic Capital -
(Risk adjusted Return on Capital)


  • RAROC helps the bank to decide whether the business with its risk profile and budget economic capital add shareholders value or not.
  • RAROC is a measure of the expected return on economic capital over the life of an investment.
  • RAROC = Risk - Adjusted Return(Income)/Economic Capital.
  • Risk Adjusted Return = Revenue - Funding Cost or TPM - Credit Provisions(for expected losses)  - Administrative Expenses  - Capital Charge on RWA 



Uses Of RAROC

  • It is an improvement over the traditional approach in that it allows one to campare two businesses with different risk(volatility of returns) profiles.
  • Using the hurdle rate (expected rate of return), a lender/financial institution can also use the RAROC principles to set the target pricing for a relationship or a transaction.


Inputs Used For Calculation Of RAROC  - 

  • PD - Probability of Default
  • LGD - Loss Given Default
  • EAD - Exposure of Default
  • M - Maturity & Correlation Factor                               
Risk Adjusted Performance Measure(RAPM) - 
Example - Forex Dealer Position -$100 m 
Volatility - 12%
Confidence land - 99% or  2.33 Standard Deviation ,
Risk Capital Required is Rs = 100000000X0.12X2.33 = $27960000

RAPM = Profit/Risk Capital.


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