YES ETF’S HAVE A FUTURE!

EXCHANGE TRADED FUNDS

EXCHANGE TRADED FUNDS

The reason why ETFs, particularly equity ETFs, haven't grown

much, is clear from the fund performance rankings. Take any
fund category and take a look at 1, 3 and 5 year returns. ETF
is not a buy and hold investment. You’ll find ETFs huddled
somewhere at the bottom of the category while active funds
are trouncing them by big margins. A brighter future for ETFs
in India can emerge on three counts.
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THE COST FACTOR

‣ ETFs come at ultra-low costs compared to active funds.

‣ Large gap between the costs charged by active funds and

those charged by ETFs.

‣ Currently the return gap between active funds and ETFs is

high because several sectors that carry sizeable weights in
the index - PSU banks, energy, metals, infrastructure - are
underperforming because of a sluggish economy but the
economy currently seems the most consistent in years.
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INSTITUTION EFFECT
‣ As more global pension funds, trusts and other institutional
investors enter the Indian markets, they too may buy ETFs over
active funds simply because that's what they're used to doing
globally.

‣ Local ones like the EPFO and other pension funds too are likely
to invest their substantial kitty in index stocks, if not ETFs, to
ramp up equity exposure.

‣ As the money from domestic institutions can be a sizeable force

in the markets in the years to come, this can lift the prices of
index stocks and make it harder for active funds to beat ETFs.
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SMARTER ETFS

▸ Floatation of smart BETA ETFs. They are based on specially

constructed indices that feature stocks better suited to
long term investing rather than gold, NIFTY, SENSEX and
the PSU stocks.

‣ If Smart Beta ETFs become the norm, then they will prove
far more difficult to beat than the old-fashioned
bellwethers such as the Nifty or the Sensex.
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CPSE FUND SUCCESS A CATALYST FOR THE DEVELOPMENT OF ETFS

‣ Investors poured Rs9,200 crore ($1.4 billion), or 3.7 times

the targeted amount, into a fund of the top 10 state-run
companies, according to Reliance Mutual Fund, which
manages the pool. It was the third time in three years the
government used the Central Public Sector Enterprises
ETF, or CPSE, to raise assets. A first sale in March 2014
generated Rs4,300 crore and a second tranche in January
raised at least Rs4,500 crore. Proceeds will be used to
maintain public spending without increasing the fiscal
deficit.
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Indian households are putting more money into financial

assets as slowing inflation reduces the value of gold and
Modi’s cash ban shock damps demand for real estate. Money
managed by local ETFs have almost tripled to $6 billion in
the past three years, the fastest pace after Japan, according
to the data from the Association of Mutual Funds in India.
The investments still make up just 2% of the industry’s total
Rs18,00,000-crore assets.
EXCHANGE TRADED FUNDS

In the case of CPSE, retail investors put bids of more than

Rs3,500 crore rupees, swayed by its performance. Data
compiled by Bloomberg show the fund has climbed 43% in
the past year, more than double the gain in the Sensex. The
outperformance will help stoke interest for such products,
according to Outlook Asia Capital Pvt.
TOP PERFORMING
ETFS
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DIREXION DAILY MSCI INDIA BULL 3X ETF (INDL)

INDL uses the MSCI India Index as its benchmark. While it aims to invest 80% of its assets in
securities from the index, the other 20% may be invested in leveraged financial instruments.
The goal is to achieve a 300% return. That is, the fund tries to grow at three times the rate of
the index.

This adds a great deal of risk because losses can be accelerated the same way gains can
when holdings are leveraged. The focus on large-cap and mid-cap stocks helps offset some
of the risk because they are more stable than micro-cap stocks.

• Avg. Volume: 50,463

• Net Assets: $108.65 million

• Yield: 0.00%

• YTD Return: 72.51%

• Expense Ratio (net): 0.95%

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COLUMBIA INDIA INFRASTRUCTURE ETF (INXX)

This ETF follows the Indxx India Infrastructure Index as its benchmark. At least 80% of
assets go into companies that are listed on the index.

The focus is on companies involved in infrastructure, so this would be an investment for

those who think India is likely to grow its infrastructure to meet the needs of the world’s
second-largest population (behind China). This focus gives investors the opportunity to
invest in a narrow slice of the Indian economy, albeit a vital one.

• Avg. Volume: 37,087

• Net Assets: $50.98 million

• Yield: 2.36%

• YTD Return: 27.65%

• Expense Ratio (net): 0.98%

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VANECK VECTORS INDIA SMALL-CAP ETF (SCIF)

For investors who like both small-cap stocks and Indian stocks, SCIF is an opportunity
to invest in this specialised basket of stocks: the MVISä India Small-Cap Index.

The fund may use depositary receipts in addition to investing directly in securities
from the index. Note that micro-cap companies are included in the index, so this
investment can carry higher risk than other India ETFs.

• Avg. Volume: 102,531

• Net Assets: $320.39 million

• Yield: 1.02%

• YTD Return: 36.42%

• Expense Ratio (net): 0.78%

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ISHARES MSCI INDIA SMALL-CAP (SMIN)

SMIN attempts to achieve the same performance as the MSCI India Small Cap
Index. It may, from time to time, invest in securities that are not in the index but
that are expected to behave similarly to securities that are in the index.

Note that the companies represented are in the bottom 14% of all Indian
companies in terms of market capitalization.

• Avg. Volume: 77,580

• Net Assets: $186.34 million

• Yield: 1.74%

• YTD Return: 33.40%

• Expense Ratio (net): 0.80%

ACKNOWLEDGEMENT
Special thanks to Mr. Nayan Parekh for constantly guiding me
throughout the research work.

▸ http://www.livemint.com/Money/O16JgAdLQyeItD7WyuBf4K/
CPSE-funds-success-seen-broadening-ETF-market-in-India.html

▸ http://etfdb.com/etf-education/five-essential-tips-for-analyzing-etfs/

▸ http://economictimes.indiatimes.com/kotak-nifty-etf-fund/
mffactsheet/schemeid-10843.cms

▸ http://economictimes.indiatimes.com/birla-sun-life-nifty-etf-fund/
mffactsheet/schemeid-13012.cms