Everything that you want to know about ETFs (Exchange Traded Funds)

ETF as an investment concept has failed in India. The introductory stride has been lost. Even with 10 years of existence in Indian markets they have not able to make any space in investor’s portfolio. If we talk about Indian Mutual Fund industry ETF share is less than 1% & if we remove Gold ETFs which were or are in fancy these days picture is even worse. But let’s first understand basics about ETF & then see why I started with a negative statement.

What is ETF?

If we talk about the structure of the ETFs, it is same as Mutual Funds – basket of few stocks. If we talk about category it is just a replica of index funds which is made to replicate an index. Eg Gold ETF, Nifty ETF, Bank Nifty ETF, Hangseng ETF etc. ETF stands for Exchange Traded Fund because they are listed on stock exchange. In most of the case these are passive funds where fund manager’s role is negligible.

Must Read – Let us Make Sense of the Sensex and Nifty

How ETF Works?

ETF Comparison with Open-ended Mutual Funds & Close Ended Mutual Funds

Open Ended Fund Closed Ended Fund Exchange Traded Fund
Fund SizeFlexibleFixedFlexible
NAVDailyDailyReal-Time
Liquidity ProviderFund ItselfStock MarketStock Market / Fund Itself
AvailabilityFund ItselfThrough Exchange where listedThrough Exchange where listed / Fund itself.
Portfolio DisclosureDisclosed monthlyDisclosed monthlyDaily/Real-time
Intra-Day TradingNot possibleExpensivePossible at low cost

Source – Benchmark AMC

ETF Benefits

As we have seen that ETFs work like Mutual Funds so basic benefits of both are same like Diversification, Transparency, Tax benefit etc. Few more advantages:

Any time NAV: In mutual funds whenever you put your investment/redemption you will get closing NAV of that particular day but in ETF you can buy it anytime during the trading hours.

Low Asset Management Cost: As ETF are passive funds they don’t have to incur fund management charges, plus they are sold without intermediaries that keep total cost low.

International Exposure: If you would like to invest in international markets, ETF is a better way as it gives you diversification benefit in that marked & you also know much about those countries active funds. Globally there are many ETFs which focus on Indian Markets – you can check India ETF List at Onemint.

ETF List: Performance, Category, Asset Size

 

 

ETF – Exchange Traded Funds

Category

1 Year

Asset Rs Cr

Expense %

Price

Bank BeES Exchange Traded Scheme
Banking

12.7

993

0.5

1,115

Kotak PSU Bank Exchange Traded Scheme Banking

7.83

30

426

PSU Bank BeES Exchange Traded Scheme Banking

5.71

10

0.74

407

Reliance Banking Exchange Traded Scheme Banking

9.47

12

0.35

1,040

Hang Seng BeES ETF Global

5.06

61

1

1,280

ICICI Prudential SPIcE Exchange Traded Scheme Large Cap

-3.33

0

174

Kotak Nifty Exchange Traded Scheme Large Cap

6.65

569

Kotak Sensex Exchange Traded Scheme Large Cap

4.85

28

193

Motilal Oswal MOSt Shares M50 ETF Large Cap

-2.02

0

76

Nifty BeES Exchange Traded Scheme Large Cap

5.88

538

0.5

572

Quantum Index Exchange Traded Scheme Large Cap

10.23

2

0.75

581

Shariah BeES Exchange Traded Scheme Large Cap

1.86

1

0.7

121

UTI SUNDER Large Cap

-4.18

1

920

Liquid BeES Exchange Traded Scheme Liquid

0

468

0.6

1,000

Motilal Oswal MOSt Shares NASDAQ 100 ETF Other Sector

104

Birla Sun Life Gold ETF Precious Metals

2,282

Gold BeES Exchange Traded Scheme Precious Metals

23.2

2,068

1

2,211

Kotak Gold Exchange Traded Scheme Precious Metals

23.54

128

2,220

Quantum Gold Exchange Traded Scheme Precious Metals

24.19

33

1

1,107

Reliance Gold Exchange Traded Scheme Precious Metals

24.19

1,135

2,165

Religare Gold ETF Precious Metals

25.97

1

2,280

SBI Gold Exchange Traded Scheme Precious Metals

25.03

238

1.07

2,283

UTI Gold Exchange Traded Scheme Precious Metals

20.95

567

1

2,175

Junior Nifty BeES Exchange Traded Scheme Small & Mid Cap

-1.05

108

1

113

 Why ETF Failed in India?

The reason should not be performance because most of the ETFs are passive funds in India and try to mimic performance of some Index. Performance wise certain ETFs like Gold have given more and consistent returns than the broad market in the last 2-3 volatile years. But main reason looks…

Index Vs Diversified Funds: If we compare equity ETFs performance with diversified equity mutual funds in longer horizons, ETFs looks far behind. But check DSP BlackRock Equal Nifty 50 Fund

Expense Ratio: Biggest benefit an investor seeks in ETF is lower expenses but even on this aspect Indian funds scores low. Internationally ETFs average charges are close to .53% but in India most of the equity related ETFs are charging more that this – some even charging 1%. Vanguard which is one of the biggest ETF players charges just .16% & in some cases as low as .07%. This is possible due to economies of scale but still difference is huge.

Other incidental Charges: Over & above the basic fees investor has to pay brokerage & other charges relating to manage his equity account. Many investors who just wish to invest in MF find it inconvenient to maintain a demat account with a broker.

Skewed Indexes: Top 3 stocks in Sensex Reliance, Infosys & ICICI make 27% of the index even nifty which is having 50 stocks – top 3 contribute more than 24%. This is even worse for sector index – in bankex top 2 stock weightage is more than 50%.

Liquidity: Liquidity is not very good in most of the Indian ETFs. So, sometime when you want to buy the units are not available and when you go for sell, there are no buyers.

Are we recommending ETFs?

Right now we are not suggesting investor to go through ETF route due to above mentioned reasons. As ETFs are not very popular in India they are very illiquid too. Few of the ETF were not even traded a single unit in 30-40% of the transaction days in year 2010. So investors have a good chance to get stuck or taken for a ride. In 2006 ICICI Pru Spice Fund which actually tracks Sensex was up by 200% in a fortnight. Due to unawareness & poor volumes someone spiraled the prices just by a wrong trade.

How ETFs can become popular in India?

ETF are traded through stock exchanges & are suggested by brokers – not by mutual fund advisors. ETF are meant for passive long term investors & that’s not a good thing for a stock broker. Stock brokers earn on volumes rather than if somebody holds it for long term so there is clear conflict of interest. So I don’t think much can be done on this but if investors are made aware about the benefits there is a chance that things can be better in future. One more thing that can be done is bringing the variety right now. Most of the ETF are either Gold or large cap equity funds. Only 2 ETF are there which give you international exposure – so there is still scope to bring variety which can increase the interest. Even on commodity side there is a big scope but there is no clarity who will govern them – due to conflict between Securities and Exchange Board of India (SEBI) and Forward Market Commission (FMC) even Silver ETFs are stuck.

ETF in India Vs US

In US ETF are there from last 20 years – as a segment is growing at a pace of 32% every year & biggest reasons that comes out is the lower cost, fund managers ability to beat broader index & the variety of ETF available. Indian ETF fails on all these criteria’s. Biggest ETF in US is $89 Billion which is more than half of the Indian Mutual Fund Industry Size. And total ETF assets in US stands at $1 trillion which is close to 2/3 of total Indian Market capitalization. In US there are more than 2000 ETFs listed & in India number is less than 30 – another 13 are with SEBI for clearance. So one can clearly see the difference but this is the same case if we talk about Indian Mutual Funds – in US 39% of the households invest more than 50% of their financial assets through Mutual Funds but in India less than 1% have ever invested a penny in it. This can be blamed to poor Financial Literacy in India, lack of distribution facilities, higher operational cost and quality manpower.

Is there some hope for ETF

India is a fast growing economy & with kind of demography we have a big scope for newer & better financial products. Goldman Sach who is a big player in ETF has signaled regarding the growth of ETF by buying India’s Benchmark AMC which was a niche ETF player. Even IDBI AMCs is focusing on Index Funds &  Motilal Oswal AMC trying something new with ETFs shows it’s a beginning towards passive investing. Hope for a better picture of ETF in future.

My final words – tough to Control Emotions: When you have a demat account it is very tough that you will only be holding ETFs – someday you will also be tempted to buy or trade in direct equity. Which may turn out dangerous for your financial health.

Have you ever invested in ETFs & what’s your experience? Share in comment section.

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Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.

36 COMMENTS

  1. Hi Hemant,

    Yes its true.. Gold is the reason why ETF’s are still alive in India. But Hemant what is the reason that people are not investing in index funds.. Index funds are generally considered as very good as the the charges are much lower than diversified equity funds. Do you think performance of index funds is not as good as diversified funds?

    • Hi Manoj,
      It is a myth that Index fund are charging less – in 99% of the cases it is 1% & in some other case it is even 1.5%. Why so high charges – even there is no role of fund manager or fund management teams. Plus most of the index funds have huge tracking errors.
      From the same fund house active funds are available at 1.75-2%.

  2. Hi, Hemant,i have a demat account and want to buy e-gold how do i go about it.secondly can i send you a email ?as i need your advice on sips,could you give me your email address?

    • Hi Deepak,
      For SIPs will suggest you to add your query here – hopefully you get some answer
      https://www.tflguide.com/2011/07/best-mutual-fund-for-sip.html
      Since e-Gold can only be purchased in electronic form, you need to have a demat account. The existing demat account which you are using for transacting in shares etc. does not work for holding e-Gold units.
      Hence, you need to open a separate demat account with one of the depository participant empanelled with the National Spot Exchange Limited.

  3. very informative article.
    i invest in Benchmark Nifty BEES which is an ETF based on Nifty.
    Also in Benchmark’s Gold BEES, which is a Gold ETF.
    Though these ETFs have a fair amount liquidity, i do worry about the liquidity aspect. Cost of 0.5% to 1% is insanely high, when compared to US products.
    But still cheaper than other options available.

  4. I have Invested GoldBees now it is up 20% after one year.

    Other than Gold ETF faces liquidity issues. Difficult to buy and Sell.

    Regards
    Mohan R

    • Hi Mohan,
      That’s the biggest problem with ETFs in India – if you have seed ICICI Pru Spice Chart, it is just insane. Same thing have also happened in debt based close ended Mutual Funds 🙁

  5. Hemant,

    Excellent article, thouroughly analysed all the aspects.
    One of the must read article.

    One quick request, is it not possible for you to provide, as PDF file, enable us to read /refer for future?

    Good work, keep it up.

    Krishnan

  6. Hi Hemant ,

    There are many website which offer tools that will convert HTML document to PDF Format , simply you can google for them

  7. Hey Hemant,

    I usually buy benchmark ETF when ever the market falls. If the market is high ( I do a relative PE claculation), I just hold it in Cash. For the past 1 year I ahve not bought any ETF. I just do SIP with MF.

    For me this is just part of my total portfolio. i would like to have atleast 15% of my portfolio in Index fund/ETF but Iam not too impressed with the cost. For 1 % more I can have some one like Prashant manage my fund (HDFC top 200).
    I believe Index fund should be part of ones Core portfolio along with Direct equity/ Large cap Fund and one Large and Mid cap fund.

    Karthik

  8. How does ETF recover management expenses? For example a gold ETF has 0.5% management expense and I sold one unit after 1 year, will 0.5% be transferred to AMC of ETF at time of selling?

  9. Does these fund houses buy Physical Gold worth of their all Gold ETFs?, say tomorrow all Gold ETFs holders want physical gold, does fund houses capable of delivering it?

  10. Hi hemant,

    Is it worth to invest in e-gold? Because it is new in India and I m in Ahmedabad so physical deliveries is possible.

  11. Hi Hemant,

    I don’t have an demat A/c and infact don’t need one. Can i go for SBI Gold Exchange Scheme with having a demat A/c

  12. Dear Hemant, Last month, I have started DIYSIP in UTI Gold ETF via my HDFC Securities trading account. Do You think, it is a good decision? Should I continue with it or Exit? Kindly advice.

  13. Hi,

    I started DIY SIP on HDFCGOLDETF in hdfcsec last month. Now I need to cancel it, but i dont find enough information in hdfcsec site. Can you please help me on this

  14. Hello Rajesh,
    Ur right there is no information on the website for DIYSIP account. But if you want to cancel, edit, or freeze your DIYSIP, you simply have to call customer care, and it will be done over the phone immediately. Very simple.. I experienced the same last week..

  15. hi, first of all very thankful for a very informative article..actually i m going to do my project work in this area….i want to compare the performance of ETF’s and Mutual Funds…wht r ur views regarding the areas to be covered in this study to make it worth….

  16. Hi ,

    This is Manjunath, working in IT sector, after reviewing your views in investments, i become a small advisor among my friends cirlce.

    I am suggesting to my friends to take term insurance and invest in mutual friends , ppf.
    I came across the investment Egold and ETF i.e investing in gold.

    Can you tell me about Egold and how it is working and where to open an account
    Is any brokerage commission is hided while training Egold?

    Appreciate your inputs on this.

    Thanks
    Manjunath.C

  17. Sir why why you wrote “someday you will also be tempted to buy or trade in direct equity. Which may turn out dangerous for your financial health.”
    plzzz explain me the sentence.

  18. i buy in 2010 ICICI GOLD EXCHNGE TRADED MUTUAL FUND BY CHECK ONLY NOT IN DEMAT. BUT WHEN I GO IN 2015 FOR SELL TO AMC THEY SAY OPEN A DEMAT ACCOUNT AND TRANSFER UNITS IN DEMAT . I OPENED IN DEMAT AC ICICI DIRECT , BANK AC IN IN ICICI , GOLD FUND OF ICICI , BUT I AM UNABLE TO SELL . FEEL VERY BAD ABOUT ICICI . LAST 3 MONTHS I GO HERE and there NO BODY IS HELP IN ICICI VERY BAD ICICI

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