ETF is the new animal in the town. As the world goes digital, people would like to invest on the go and track investment from anywhere. ETF is the convenient digital solutions that take a few minutes to order the investment as you nibble with your ‘swiggy’ order. Let’s have a close encounter of the first kind to know it better
Key Highlights
- Introduction to Index Fund & ETF
- Why ETF
- Variance Analysis
- Trade volumes of ETF
- Ready Reckoner & Summary
- Introduction
ETFs are nothing but a special purpose vehicle that has a basket of securities that are traded, like individual stocks, on an exchange. Unlike mutual funds, ETFs can be bought and sold throughout the trading day like any stock.
ETF in US Markets
It was introduced in the USA in 1993. Though it took some years to attract public attention it made a wave in the last 2 decades. The most popular ETF include
- SPDR – $278 billion
- Vanguard – $113 billion
- QQQ – $ 76 billion
- EEM – $ 35 billion
This trend is catching up with other emerging markets in Asia such as Japan, Hong Kong, and India now for its efficacy.
ETF in India
The Index Funds and ETF have grown in popularity amongst investors thanks to the ease of investing, close to market returns and cost optimization. Given the fact that the Indian economy is poised to grow at a much faster rate than most global economies, it provides a great opportunity to participate in the growth story especially through equities.
The best and easy way to participate will be index fund and Exchange Traded Funds (ETF). ETF offers a great starting point to invest in Equities and for beginners and many trust and institutions, it provides an excellent avenue to park their investment to generate the alpha in the portfolio.
Globally Pension and retirement funds invest majorly in Index or ETF funds and it is soon catching up in India with allocation to Equity becoming the norm of the changing context of Investment.
Index Fund has been there close to 20 years in India now. However, the trends to investing picked up with institutions and individual investors were able to see the merit in investing in a basket of stocks or indices instead of single or a bunch of stocks.
- Why ETF?
They have been introduced into the market recently. A sneak peek into the Index Fund and ETF to know how they stack up will throw some valuable insights to make your decision on investing in Equities the right way
They offer the convenience of holding your investment in De-mat mode. They are traded in exchange and easy to access and invest. Some of the key highlights of ETF is
- Lower Annual expenses compared to Mutual funds
- Index tracking: The best possible strategy to participate in the market for long term investing
- ETF gets an edge over Index Fund as they don’t have any issuance cost and fund expenses are much lower and have lesser tracking error when compared to the benchmark
ETF Turf
| Scheme | Category | AUM (Cr) | Exp (%) | Start Date | 1 YR | 3 YR |
|---|---|---|---|---|---|---|
| SBI | NIFTY | 51,780 | 0.07 | 1-Jul-15 | 10.79 | 15.87 |
| CPSE | PSU | 7,228 | 0.01 | 25-Mar-14 | -1.11 | 10.79 |
| SBI | NIFTY bank | 1,243 | 0.20 | 16-Mar-15 | 16.88 | 21.57 |
| LIC | SENSEX | 367 | 0.10 | 23-Nov-15 | 12.46 | 16.52 |
| LIC | NIFTY 100 | 306 | 0.25 | 3-Nov-16 | 7.60 | 15.50 |
| HDFC | NIFTY | 268 | 0.05 | 9-Dec-15 | 10.78 | 15.82 |
| Birla | NIFTY | 211 | 0.05 | 22-Jul-11 | 10.33 | 15.61 |
| Motital | NASDAQ | 134 | 0.50 | 29-Mar-11 | 22.67 | 22.72 |
Index Funds Pedigree
| Index Fund | Category | AUM (Cr) | Exp (%) | Start Date | 1 YR | 3 YR |
|---|---|---|---|---|---|---|
| UTI | NIFTY | 1,127 | 0.17 | 6-Mar-00 | 10.51 | 15.47 |
| HDFC | NIFTY | 563 | 0.3 | 17-Jul-02 | 10.35 | 15.37 |
| ICICI | Next 50 | 380 | 0.85 | 25-Jun-10 | -9.27 | 13.37 |
| ICICI | NIFTY | 379 | 0.75 | 26-Feb-02 | 9.7 | 14.62 |
| SBI | NIFTY | 353 | 0.66 | 4-Feb-02 | 9.96 | 14.92 |
| HDFC | Sensex | 310 | 0.3 | 17-Jul-02 | 11.84 | 16.08 |
| Franklin | NIFTY | 250 | 1.08 | 4-Aug-00 | 9.45 | 14.31 |
| IDBI | NIFTY | 220 | 0.99 | 25-Jun-10 | 9.37 | 13.75 |
| IDFC | NIFTY | 145 | 0.27 | 30-Apr-10 | 10.4 | 15.38 |
| Birla | NIFTY | 141 | 0.8 | 18-Sep-02 | 9.48 | 14.18 |
3. Variance Analysis
Common Criteria
- Funds were ranked by tracking errors of 1 and 3-year performance.
- Minimum 100 Crores of the corpus
- Minimum of 3 years track record
Scope A: Ranked on Tracking Error:
An analysis of the top index Fund and ETF was done. The funds were ranked by tracking error on 1 year and 3 years performance. With a minimum of 100 Crores of corpus and at least 3 years of existence, we ranked the funds to know the top 5. Surprisingly all the top 5 funds were from the ETF category
| Scheme | Type | Cat | AUM (Cr) | Exp (%) | Start Date | 1 YR | 3 YR | 1 YR TE | 3 YR TE |
|---|---|---|---|---|---|---|---|---|---|
| CPSE | ETF | PSU | 7,228 | 0.01 | 25-Mar-14 | -1.11 | 10.79 | 4.13 | 1.74 |
| LIC | ETF | SENSEX | 367 | 0.10 | 23-Nov-15 | 12.46 | 16.52 | -1.49 | 0.52 |
| SBI | ETF | NIFTY | 51,780 | 0.07 | 1-Jul-15 | 10.79 | 15.87 | -1.38 | 0.47 |
| SBI | ETF | NIFTY bank | 1,243 | 0.20 | 16-Mar-15 | 16.88 | 21.57 | 0.14 | 0.44 |
| HDFC | ETF | NIFTY | 268 | 0.05 | 9-Dec-15 | 10.78 | 15.82 | -1.39 | 0.42 |
Note: TE – Tracking Error in absolute terms which is the difference between ETF and benchmark
Scope B: Ranked on performance:
The results were tabulated with index funds and ETF to get an overall picture by performance
| Scheme | Type | Category | AUM (Cr) | Exp Ratio | 1 YR | 3 YR | 1 YR TE | 3 YR TE | RANK |
|---|---|---|---|---|---|---|---|---|---|
| Motilal | ETF | NASDAQ | 134 | 0.5 | 22.67 | 22.72 | -2.03 | -2.29 | 1 |
| SBI | ETF | NIFTY bank | 1,243 | 0.2 | 16.88 | 21.57 | 0.14 | 0.44 | 2 |
| LIC | ETF | SENSEX | 367 | 0.1 | 12.46 | 16.52 | -1.49 | 0.52 | 3 |
| HDFC | Fund | Sensex | 310 | 0.3 | 11.84 | 16.08 | -2.11 | 0.08 | 4 |
| SBI | ETF | NIFTY | 51,780 | 0.07 | 10.79 | 15.87 | -1.38 | 0.47 | 5 |
| HDFC | ETF | NIFTY | 268 | 0.05 | 10.78 | 15.82 | -1.39 | 0.42 | 6 |
| Birla | ETF | NIFTY | 211 | 0.05 | 10.33 | 15.61 | -1.84 | 0.21 | 7 |
| LIC | ETF | NIFTY 100 | 306 | 0.25 | 7.6 | 15.5 | -0.19 | -0.18 | 8 |
| UTI | Fund | NIFTY | 1,127 | 0.17 | 10.51 | 15.47 | -1.66 | 0.07 | 9 |
| IDFC | Fund | NIFTY | 145 | 0.27 | 10.4 | 15.38 | -1.77 | -0.02 | 10 |
Interestingly ETF scores the most amongst the list with 7 out of 10 showing up with high performance
- The traded volumes of ETF
| S No | ETF | DAV (lacs) * |
|---|---|---|
| 1 | CPSE | 7414 |
| 2 | ICICI Bharat 22 | 5860 |
| 3 | Kotak NIFTY Bank | 1210 |
| 4 | Nifty BEES | 825 |
| 5 | SBI NIFTY Bank | 240 |
| 6 | SBI NIFTY | 172 |
| 7 | Reliance Junior nifty | 154 |
* Daily average value of Turnover in NSE as of 30th April 2019
- Ready Reckoner on ETF
| Index | Name | AUM (Cr) | Exp (%) | 1 YR | 3 YR | DAV (lacs) | Cat Rank |
|---|---|---|---|---|---|---|---|
| NIFTY | SBI NIFTY | 51,780 | 0.07 | 10.79 | 15.87 | 172 | 1 |
| PSU | CPSE | 7,228 | 0.01 | -1.11 | 10.79 | 7,414 | 2 |
| PSU | Bharat 22 | 9.976 | 0.01 | 3.01 | 0 | 5,860 | 1 |
| Bank | Kotak Nifty Bank | 7,048 | 0.18 | 16.77 | 21.54 | 1,210 | 2 |
| Bank | SBI NIFTY bank | 1,243 | 0.20 | 16.88 | 21.57 | 240 | 1 |
Summary
- NIFTY ETF has an expense ratio of 0.05% Vs Index funds that have 0.20 – 1.00%
- ETF has one of the lowest STT @ 0.001% on the sell side
- Held in De-mat mode and hence eligible as stock margin
- The trading volume of ETF to be considered while selecting ETF
Conclusion
Investors such as Individuals, Trusts, and Institution have already invested and have seen the benefits of ETF. As William Sharpe, the Nobel laureate says it will be increasingly difficult for an active fund manager to beat the index.
Increasing numbers of investors in the US that include individual, Trusts, pension funds and institutions have moved in favor of ETF. One of the largest Mutual Funds in the US is the Vanguard S&P 500 Index Fund. India will not be too far in terms of the client interest.