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
Source – Benchmark AMC
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
|Bank BeES Exchange Traded Scheme|
|Kotak PSU Bank Exchange Traded Scheme||Banking|
|PSU Bank BeES Exchange Traded Scheme||Banking|
|Reliance Banking Exchange Traded Scheme||Banking|
|Hang Seng BeES ETF||Global|
|ICICI Prudential SPIcE Exchange Traded Scheme||Large Cap|
|Kotak Nifty Exchange Traded Scheme||Large Cap|
|Kotak Sensex Exchange Traded Scheme||Large Cap|
|Motilal Oswal MOSt Shares M50 ETF||Large Cap|
|Nifty BeES Exchange Traded Scheme||Large Cap|
|Quantum Index Exchange Traded Scheme||Large Cap|
|Shariah BeES Exchange Traded Scheme||Large Cap|
|UTI SUNDER||Large Cap|
|Liquid BeES Exchange Traded Scheme||Liquid|
|Motilal Oswal MOSt Shares NASDAQ 100 ETF||Other Sector||–||–|
|Birla Sun Life Gold ETF||Precious Metals||–||–|
|Gold BeES Exchange Traded Scheme||Precious Metals|
|Kotak Gold Exchange Traded Scheme||Precious Metals|
|Quantum Gold Exchange Traded Scheme||Precious Metals|
|Reliance Gold Exchange Traded Scheme||Precious Metals|
|Religare Gold ETF||Precious Metals|
|SBI Gold Exchange Traded Scheme||Precious Metals|
|UTI Gold Exchange Traded Scheme||Precious Metals|
|Junior Nifty BeES Exchange Traded Scheme||Small & Mid Cap|
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.