05-03-2013, 12:24 PM
Exchange Traded Funds - Its Growth & Challenges in India
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INTRODUCTION
Exchange Traded Funds are essentially Index
Funds that are listed and traded on exchanges
like stocks. Until the development of ETFs, this
was not possible before. Globally, ETFs have
opened a whole new panorama of investment
opportunities to Retail as well as Institutional
Money Managers. They enable investors to gain
broad exposure to entire stock markets in
different Countries and specific sectors with
relative ease, on a real-time basis and at a
lower cost than many other forms of investing.
An ETF is a basket of stocks that reflects the
composition of an Index, like S&P CNX Nifty or
BSE Sensex. The ETFs trading value is based
on the net asset value of the underlying stocks
that it represents. Think of it as a Mutual Fund
that you can buy and sell in real-time at a price
those changes throughout the day.
As it tracks a Benchmark Index, the return
expectation is the same as that of the Index. For
example, if for a particular period, say from 1st
Jan to 31st of March the ROI on Nifty is 10%,
then the NAV of the ETF that tracks Nifty should
also be around 10%. The minor difference in
return between the NAV and the Benchmark
Indices could be because of the fact that there
would be some cost involved in managing the
ETF. This is commonly referred as Tracking
error (as this term is referred later)
A Brief on Global ETF Industry.
They first came into existence in the USA in
1993. It took several years for them to attract
public interest. But once they did, the volumes
took off with a vengeance. As of September
2010, there were 916 ETFs in the U.S., with
$882 billion in assets. About 60% of trading
volumes on the American Stock Exchange are
from ETFs. The most popular ETFs are QQQs
(Cubes) based on the Nasdaq-100 Index,
SPDRs (Spiders) based on the S&P 500 Index,
iSHARES based on MSCI Indices and TRAHK
(Tracks) based on the Hang Seng Index. The
average daily trading volume in QQQ is around
89 million shares.
Growth of Domestic ETF Industry
India’s journey started with Benchmark launching
the first ETF called Nifty BeEs in 2002. Since
then fund has come a long way with AUM rising
to 587 Crs from less than Rs. 10 Crs mobilized
through NFO. Today there are 32 ETFs in MF
industry of which 11 are in Gold category and
balance 21 in other category. The total AUM
managed under Indian ETF umbrella is close to
10,838 Crs as of Oct 2011 of which 83%
belongs to Gold ETFs. With the arrival of Gold
ETFs the segment has acquired enhanced
interest from investing community and today it
has more than 5.54 lac investor (4.28 lac in
Gold ETFs and 1.25 lac in other ETFs) in overall
ETFs segment. The investor spread is across
Corporate, HNIs, Retail and Banks / FIs