Exchange-traded funds, commonly known as ETFs, are a collection of different securities such as shares, bonds and money market instruments which often track an underlying asset. In simple word, ETFs are an assortment of many different investment avenues and opportunities. They are the perfect combination of the two most famous financial instruments that is Mutual funds and stocks. Over the past few years, they have become very famous investment opportunities amongst institutional and individual investors. Like stocks, they too are listed on different stock exchanges and can be traded through Demat accounts during open market hours.
Investing in ETFs is quite simple, though one should always research and read about the following parameters such as ETFs expense ratio, tracking error and liquidity. ETFs are useful for those investors who want to focus on a particular industry, currency, asset class and a region at a certain point of time. Investors also need not worry about researching much except the basics.
There are many different types of ETFs in the market. Some of the famous ETFs are Index ETF, Gold ETF, Bond ETF, International ETF, Liquid ETF, Commodity ETF, Inverse ETF and Leveraged ETF. Index ETFs replicate an indices performance. Gold ETFs tracks the price of Gold in the market, and it is the same value as 24 pure physical gold. Bond ETFs replicates the returns of bond indexes, generally they are highly liquid and diversified. International ETFs invest in foreign based securities, they are passively invested around an index as an underlying. Liquid ETFs invest in short term money market instruments, call money and government securities which have short term maturity, the main objective is to increase returns and reduce risks. Commodity ETFs are administered in future trading by dealing in precious metals. Inverse ETFs are also referred to as Bear ETFs or Short ETFs, the returns perform inversely to the benchmark index portfolio. Leveraged ETF are high risk ETFs that use debt and financial instruments to increase returns.
Investing in Exchange traded funds is a good idea because it has more advantages and benefits than limitations and drawbacks. Some of ETF’s advantages are its cost- effective, efficient, flexible, lucrative, convenient, no unsystematic risk, high performance, liquid, transparency and simple. Some of disadvantages include high costs from agents and volatility.
There are around 10 types of application of ETFs in India, which include tactical adjustment, core allocation, rebalancing, portfolio completion, international diversification, liquidity management, transition management, risk management, interim beta, and cash equitization. Tactical adjustment is the most popular, it uses ETFs to allocate assets based on the market and the current economic environment.
Every year ETFs make billions of dollars in revenue, it is an avenue in finance which has grown four times in size since in evolution. Every year there are hundreds of new ETFs launched around the world.
ETFs were first developed in 1990s to provide access to individual investors with passive indexed funds. The first ETF that was launched, it tracked the S & P 500 in the US. In India, its first ETF was launched in 2001 which was known as The Nifty Benchmark Exchange- Traded Scheme also known as Nifty BeES. It was launched by the Benchmark Mutual Fund. The first debt ETF in India was launched in 2004 which was also by the Benchmark Mutual Fund and was known as Liquid BeES. The first Gold ETF in India was launched in 2007 and Gold ETFs became very popular between 2008 and 2013.
Assets under management for ETFs in India grew from INR 15.13 thousand crores in September 2015 to INR 218.82 thousand crores in September 2020. The five-year growth was about 15x and the CAGR was around 70%. In India the major share of investments in ETF, that is around 88% is held by institutional investors and retail investors hold only 3% whereas in US, ETFs are driven by both retail and institutional investors. In India SEBI and AMCs are making efforts to educate Indians about ETFs. They are also trying to create a community of DIY investors who would be interested in investing in ETFs. A lot of high net-worth individuals and family offices are looking into ETFs as an avenue for passive investments.
Bharat- 22 is a government led ETF which is a tax efficient opportunity. The top ETFs in India are Nippon India ETF Hang Seng BeES-G, Nippon India ETF Consumption-G, Nippon India ETF Consumption-G, SBI ETF Consumption-G, ICICI Pru FMCG ETF-G, and Mirae Asset Nifty Financial Services ETF-G. There are around 8 Indian ETFs that trade in US which include iShares MSCI India Small Cap ETF and Wisdom Tree India Earnings Fund.
To conclude Exchange traded funds can offer convenient and cost-effective exposure to a diversified range of investment categories and opportunities but at the same time some might blame them for the volatility in the market. Over the last year 20 years, their growth in India has been exponential and projections only show that their growth is not stopping any time in the future. ETFs are one of the fastest growing instruments in the history of the finance industry.
Follow Us @
