One global-investing trend that has found few takers in India is passive investing. There's a very good reason for this. Indian ETFs and index funds have historically been both boring and inefficient. A majority of them track the Nifty 50 or the BSE Sensex, two float-based indices that active managers have found quite easy to beat. Index funds also come with high costs, tracking errors and poor liquidity in the secondary market.
However, the issues with index funds are being gradually addressed. Some of India's leading AMCs have been launching new ETF products that track strategy or broader-market indices beyond the Nifty 50 and Sensex 30. They mimic benchmarks that are more useful to own for long-term investors.
Many of them are yet to build up a track record. But these ETFs may make valuable additions to retail portfolios over time. Here are five smart ETFs that you should be watching.
Motilal NASDAQ 100 ETF
Ever regretted the fact that the most exciting, world-changing consumer-technology companies - Apple, Microsoft, Amazon, Facebook, Alphabet, etc. - aren't listed in India? That's true, the technology universe in India is dominated by software services firms, which are also facing a clutch of challenges to their growth of late. If you are excited about technology nevertheless, you can own the global greats in technology by buying the US NASDAQ 100 index. Motilal Oswal Mutual Fund's Nasdaq 100 ETF offers you a convenient vehicle to take this exposure. The fund was launched in 2011 and therefore has a five-year track record. It has delivered impressive returns, with 21 per cent CAGR over five years and 16 per cent over three years.
This ETF is quite popular and often trades at a premium to its NAV in the secondary markets. The expense ratio is 1.5 per cent, not cheap for an ETF but lower than many active funds.
ICICI Pru NV20 iWin ETF
If you'd like to automate the process of value investing, you can consider ICICI Prudential NV20 iWIN ETF, an ETF tracking the Nifty Value 20 Index.
The Nifty Value 20 Index is an NSE-IISL managed smart index that is designed to track a diversified portfolio of 20 'value' stocks selected from the Nifty 50. Stocks in the Value 20 Index are selected as per the following fundamental basis: the stock's price-earnings and price-to-book ratios should be low and dividend yield and return on capital employed should be high within the Nifty 50 universe. The index constituents are reviewed and rebalanced every six months so that no single stock exceeds 15 per cent of the index. As on June 30 2017, the index sported an annualised return of 17.8 per cent since inception and a five-year CAGR of 11.1 per cent. The ETF's expense ratio is a reasonable 0.45 per cent.
Edelweiss ETF Nifty Quality 30
Do you love to own companies with steady earnings growth? The Edelweiss Nifty Quality 30 ETF may be just your cup of tea. This ETF tracks the Nifty Quality 30 Strategy Index. The Nifty Quality 30 selects companies which have durable business models, with sustained margins and returns. The top 100 stocks in the market are filtered for return on equity, low debt-equity ratio, profit growth in the last three years, with individual holdings capped at 10 per cent. The Nifty Quality 30 has managed a five-year CAGR of 13.8 per cent. The index P/E was 24.4 as of June 2017. The expense ratio of the ETF was 0.46 per cent as of June 30.
Reliance Junior BeES ETF
If you are keen to own the blue chips of tomorrow, one good place to look is the Nifty Next 50 Index, or Junior Nifty as it was earlier known. Reliance AMC runs the Junior BeES ETF, which tracks this index. The fund is among the oldest ETFs in India and was managed by Goldman Sachs and Benchmark AMC. ICICI Prudential AMC and IDBI AMC also have more recently launched index products that track the Nifty Next 50.
The Nifty Next 50 has for long been the 'incubator' for the Nifty, made up of emerging large caps in the market which may stand a chance of graduating to the Nifty. Over the long term, the Junior Nifty has been quite a difficult index to beat. The Nifty Next 50's five-year returns (21 per cent) and ten-year returns (12 per cent) beat the Nifty Midcap 100 as well as the Nifty itself. The Reliance Junior BeES ETF's expense ratio is 1 per cent.
Long-term gilt ETFs
Do you want to buy and hold the ten-year Government of India security? Well, it is difficult for you to do this as a retail investor. But there are ETF products that promise to mimic the performance of this benchmark government security by buying and holding gilt-edged bonds that mimic the 10-year G-sec's returns.
Both Reliance and LIC Mutual Fund offer long-term gilt ETFs that attempt to mirror the performance of the Nifty 8-13 year G-Sec Index by mixing and matching exposures in eight to 13-year long-term government bonds in their portfolios. These funds obviously carry no credit risk, holding only sovereign bonds, but do carry tonnes of interest-rate risk. Their returns can be high or low depending on whether you enter them at the bottom or top of an interest-rate cycle.
Why would you buy these over actively managed long-term gilt funds? As these funds maintain a constant maturity, you need not worry about the fund manager getting his rate calls wrong. As they are ETFs, you are not affected by other investors entering or exiting the fund at the wrong times. Also, their expense ratios are far lower than those of active gilt funds. Reliance Long Term Gilt had an expense ratio of 0.04 per cent and LIC G-Sec Long Term Fund had an expense ratio of 0.25 per cent as of June 2017. However, to make money on these funds you have to get your timing right and need to hold on for a long tenure, too.