ETF Investing in India
ETF’s – Exchange Traded Funds
Exchange Traded Funds are basically Index Funds that are listed and traded on exchanges like stocks. An ETF is a basket of stocks that reflects the composition of an Index, like Nifty 50, Nifty Next 50 or S&P BSE Sensex. The ETF reflects the net asset value of the underlying stocks that it represents.
In case of investment in any mutual fund scheme one can buy or sell units only on closing NAVs however in case of ETFs one can buy and sell (subject to availability of buyer/seller) in real-time at a price that changes throughout the day
Why invest in ETF’s
Asset Allocation :
ETFs provide investors with wide range of style and size options, enabling investors to take exposure in broad spectrum of the various assets in the markets. For e.g an Investor can Invest in a basket of ETFs comprising of Nifty 50, Nifty Bank, Nifty next 50, Gold ETF, Government Securities etc, consistent with his financial needs, risk tolerance and investment horizon.
Individuals as well Institutional investors worldwide invest in ETFs to conveniently, efficiently and cost effectively allocate their assets.
Cash Equitisation : Equitisation is a strategy designed to boost returns. It does this by reducing the drag on performance caused by having unnecessary cash in a portfolio.Investors typically seek exposure to equity markets, but often need time to make investment decisions. ETFs provide a place for Parking the cash designated for equity investment. Because of the liquidity the ETFs have, investors can participate in the market while deciding where to invest the funds for the longer-term, thus avoiding potential opportunity costs
Hedging Risks : ETFs are an excellent hedging vehicles as they can be bought and sold in smaller denominations. ETFs trade in smaller denominations as compared to derivative contracts so they provide a suitable risk exposure match, particularly for small investment portfolios.
Arbitrage (Cash Vs Futures) and Covered Option Strategies : ETFs can be used to arbitrage between Cash and Futures Market, as it is very easy to trade. ETFs can also be used for cover Option strategies on the Index.
Advantages of Buying ETFs
- Ease of Transaction: Buying or Selling ETFs is as simple as buying or selling any other stock on the exchange.
- Ease of Liquidity: ETFs allow investors to take benefit of intra-day movements in the market, which is not possible with open-ended Funds. Ability to put limit orders
- Low Cost: With ETFs one pays lower management fees(because of passive/ index linked fund). Being listed on the Exchange, distribution and other operational expenses are significantly lower, making them cost effective. These savings in cost are passed on to the investor.
- ETFs have lower tracking error due to in-kind creation and redemption.
- Due to its unique structure, the long-term investors can hold them without having to worry about the short term fluctuations.
- Authorised Participants / Large investors can buy in creation unit size directly from the AMC at Live Prices in creation unit sizes
Drawbacks of Buying ETFs
Trading Costs: The trading cost will vary for an investor depending on the brokerage he has account with. The cost with some brokers may be more than the savings of the management fees. Trading flexibility also proves to be a double edged sword, high turnover of your portfolio increases its cost and reduces returns.
Bid-Ask price spread:
ETFs have two prices, a bid and an ask just like a stock price. An Investor should be aware of the spread between the price one will pay for shares (ask) and the price a share could be sold for (bid). In addition, it helps to know the intraday value of the fund when you are ready to execute a trade.
At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intra-day value of the underlying securities. Those are not good times to transact business. Make sure you know what an ETF’s current intra-day value is as well as the market price of the shares before you buy.
For e.g If the Nifty Index is -1% when you are buying Nifty ETF the ETF should also quote in the same range -0.9% to – 1.10%
All ETFs are not low cost. Investors should look carefully at the expense ratio of the specific ETF they want to invest in. The Total Expense Ratio (TER) for Index funds, ETFs, shall be maximum 1% as per SEBI mandate.
ETFs are supposed generate the investment performance in line with the indexes they track. That mission is not as easy as it sounds.
Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees. In addition, the timing of dividends is difficult because stocks go ex-dividend one day and pay the dividend on some other day while the indexes’ providers assume the dividend is reinvested on the same day the company went ex-dividend.
ETFs listed on NSE are listed below :
- Nifty 50 Underlying
- NIFTYBEES – The ETF with highest volumes
- Bank Nifty
- Nifty next 50
- Nifty 100
- Nifty Private Bank Index
- Nifty PSU Bank
- Nifty50 Value 20
- LICNETFGSC -GSEC10 NSE Index
- SETF10GILT – Nifty 10 yr Benchmark G-Sec Index
- NETFLTGILT – Nippon India long term Gilt
- LIQUIDETF – Nifty1D rate index
- ICICILIQ -S&P BSE Liquid Rate Index
- EBBETF0430 -Nifty Bharat Bond
- EBBETF0423 -Nifty Bharat Bond
- Others – Equity
- UTISXN50 – Bse sensex next 50
- ICICILOVOL -Nifty 100 Low Volatility 30 Index
- SBIETFQLTY – Nifty 200 Quality 30 Index
- NETFCONSUM – Nifty Consumption
- NETFDIVOPP – Nifty Div Opps 50
- INFRABEES – Nifty Infra
- M100 -Nifty Midcap 100
- ICICIM150 – Nifty Midcap 150
- NETFMID150 – Nifty Midcap 150
- EQ30- Nifty Quality 30
- ICICIMCAP- BSE Midcap select index
- ICICIB22 – Bharat 22
- CPSE ETF
- Shariah Bees
- Global Indices
- N100 – Nasdaq 100
- HNGNSNBEES – Hangseng index
You can track the ETFs listed in India here
Should you Invest ?
ETFs have a very long way to go in India looking at the volumes traded currently. Baring few, majority have very thin volumes. I recommend investment in the following ETFs.
A. Liquidbees – For Parking your funds rather than keeping cash with your broker account
B.NIFTYBEES/ ICICINIFTY – Nifty 50 – Index is designed to measure the performance of 50 largest and most liquid blue chip companies. The index captures approximately 66.8% of float-adjusted market capitalization of listed universe in India. Niftybees is the best pick as it has the highest daily volume on the exchanges and lowest impact cost. ICICINIFTY also has good volumes on the exchanges.
C. GOLD BEES – Highly liquid this ETF provides you the opportunity to invest in Gold in smaller quantities without the concerns of security and theft. The ETF invests exclusively in physical gold with 99.5% purity. The returns of the same would correspond to the returns earned by physical gold in domestic markets.
D. N100 (Nasdaq 100) – Allocate 5-7% of your portfolio to the Index with category-defining companies on the forefront of innovation—Apple, Microsoft, Alphabet, Intel, Facebook, Amgen, Starbucks, Tesla—the index defines today’s modern day industrials.
Avoid Investments in Debt, Sectoral and Thematic ETFs unless you have studied them properly.
Send me an email at firstname.lastname@example.org, if you want to know further on ETF investing, would be glad to help.
Do leave your comments and share your views.