In less than two decades, Exchange-Traded Funds have become a major type of investment around the world. As financial instruments go, ETFs are not very old. The first ETF was launched in the US only in 1993 and in Europe in 1999. Today, a huge USD 2.3 trillion of assets globally are deployed in ETFs. However, Indian investors have almost completely ignored these funds, as you will read in a small news story in this issue.
ETFs are index-based mutual funds but are bought and sold like shares. When you want to buy or sell one, you go not to a mutual fund salesman but to a stockbroker. Unlike a normal mutual fund where you buy and sell units from the fund company itself, ETF units are traded on the stock markets between investors. ETFs are inherently very low-cost funds. While an actively managed mutual fund often deducts expenses of up to 2.25%, ETFs are generally in the 0.3% to 1% range. With compounding, this can build up to a significant difference over time.
The first Indian ETF was actually launched as long ago as 2001 by Benchmark Mutual Fund, an AMC that has since specialised in this type of fund. While Benchmark is now in the news for having been acquired by Wall Street superpower Goldman Sachs, nothing significant has happened to the ETF business in India. ETFs are just 0.25 per cent of the total assets of Indian mutual funds. Even out of that, a big chunk-almost two thirds-is Gold ETFs.
This is a disappointment. ETFs are an excellent idea and are suitable for a wide variety of investors and investment goals. The low cost and the simplicity of the product mean that ETFs often perform better than actively managed funds. While a few actively managed funds will always beat the indices, this number is getting smaller. However, ETFs do not sit well with the way funds are bought and sold in India. ETFs are basically index funds, which have never done well in India yet. Most investors seem attracted to the idea of somehow doing better than the markets and all funds are designed and sold by promoting the idea that it has something different, and thus something superior to offer to investor.
However, index funds (and by extension ETFs) are the very antithesis of this idea. These funds start by declaring themselves as unexceptional and exactly like every other fund based on the same index. In fact, that’s the very point of these funds. This means that the only audience that index funds or ETFs can possibly have is self-driven, knowledgeable investors who understand what they are getting. And while the proportion of such investors may not be so massive in the general fund investing population, I don’t think that’s the case among readers of Mutual Fund Insight and Value Research Online. Don’t let the general unpopularity of ETFs bother you-they may well be a better fit for your needs than many actively managed funds. For example, it’s entirely possible that a combination of a Nifty ETF and a Junior Nifty in various propotions could serve just about any possible equity investing needs. Whether you do it or not, being aware of such options is an important part of your education as a smart fund investor.