Software & Finance

Nifty - More Exchange Traded Funds (ETFs) needed in India

In January 2002, NSE launched trading of Exchange Traded Funds (ETFs). There are ETFs such as iPath MSCI India ETN (INP), WisdomTree India Earnings Fund (EPI), PowerShares India Portfolio (PIN) are tracking Indian Stock Marker for foreign investors. Only Benchmark Mutual Fund offers a couple of ETFs traded in NSE. Surprisingly there were not much ETFs introduced for trading in NSE in the last couple of years. I expect to see more demand from retail investors in India for ETFs.

Increasing demand for ETFs in India

FDIC - short for the Federal Deposit Insurance Corporation, provides insurances for fixed deposit and money market savings and checking account up to the limit of $250,000. There is no such insurance for huge coverage for Indian investors. If there is a collapse for a private bank, then all depositors need to lose their money in their savings account as insurance covers a tiny amount. When there is a panic in the market, retail investors may consider putting money if there is an ETF for Long and Short Dated Treasuries for India. We have iShares Barclays 20+ Yr Treasury Bond (TLT) and iShares Lehman 1-3 Year Treasury Bond (SHY) traded in NYSE for US long and short dated treasuries. It provides safety to the investors. Liquid BeES is an ETF from Benchmark Mutual Fund provides for only short dated maturities.

Many investors got burned by investing in Satyam Computers by end of 2008. It may make us to think about the need of technology Index ETF for Indian Companies like Satyam, Infosys, HCL Technologies, etc. Even if it is not diversified, it is a sector wise bet. Even one company is not doing well in the sector; the other companies in the same sector might offset the losses. We have QQQQ and QLD ETFs traded in NASDAQ to track the performance of 100% and 200% of daily return of NASDAQ -100 Index respectively. We need to have a similar ETF in India which might attract the investors in India.

If an Indian retail investor wants to invest money in another country like Brazil or Malaysia, he or she does not have any direct option. He or she has to depend on any mutual fund that investor a small percentage in foreign countries. iShares MSCI Brazil Index - EWZ, iShares Malaysia Fund – EWM, etc traded in NYSE provides this option for US investors.

Shorting securities are riskier for small investors especially. ProShares Short QQQ ETF (PSQ) traded in NYSE is short for QQQQ. We do also have SKF – Ultrashort Financial ETF and FAS – Bear 3X financials. NSE needs such kind of ETFs in bear market.

As everyone knows, another problem for retail investors putting their money into Mutual Fund is a withdrawal limitation. They cannot liquidate their positions if there is an emergency for them as they tend to invest all of their money into investments without keeping any cash reserves. ETFs provide an excellent solution for this problem since they can be traded and liquidated like Stocks in real time market hours.

Fund Manager Goal

The fund managers in India can introduce ETFs based on technology, banks and finance, oil companies, real estate and commodities, that might attract the retail investors especially. They can also introduce ultra ETFs and bear funds that can yield more profit because of increased fees and commission for them. They can consider introducing closed-end ETFs, as they are easy to maintain by creating a fixed numbers of shares and later on moving on to open-end ETFs.

ETFs introduced in United States in the recent years were successful and draw the investor’s attention. Many retail investors invested in ETFs in the recent years rather than a single stock. ETFs based on Short term Futures and derivates and ultra are riskier if the market direction is not favorable. Increased money inflow to the ETFs leads to the success for a fund manager.  


Let's take for example Airlines Industries and the need for an ETF. Claymore/NYSE Arca Airline ETF - FAA is traded in NYSE from Jan 30, 2009. Continental Airlines (CAL) peaked close to $50.00 by Jan 2007 and went down to single digit by July 2008 and then the prices have started recovering. By that time there were many discussions in the public domains and blogs that why we do not have Airlines ETF yet? People know that airlines sector is trading at cheap price but not sure which one will shoot up first? They hesitate to create their own portfolio by buying all leading airlines stocks in small proportions because of commission fees and started looking for an ETF. This leads to the rise of new Airlines ETF – FAA which begun trading at just above $21.00 on Jan 30, 2009 and peaked at 37.98 on Apr 15, 2010.

Final Thoughts

India is one of the biggest emerging markets in the world. Still there is a significant percentage of money sitting in saving account and many working class people not even entered into stock market yet. Having many ETFs on technologies, treasuries, gold and other commodities gives people some confidence to enter into the market as they are not betting on single stock or option. Even if systemic risk cannot be avoided on ETFs, it can be hedged with put options.

I expect to see many ETFs getting introduced in India in the coming years because of increasing demand by retail investors along with institutional investors.

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Posted on July 30, 2010