Hype about ETFs hides a shocking fact about this product  

July 21, 2010

 Trading volumes and turnover of equity exchange traded funds (ETFs) continue to be pathetic, in sharp contrast to the rash of ETFs that fund companies are launching

Exchange traded funds (ETFs) are coming by the dozens to the market. After a spate of gold ETFs and even a specialised index ETF by Motilal Oswal Mutual Fund, Benchmark Mutual Fund is ambitiously launching six ETFs over and above its bouquet of eight. These are IT BeES, FMCG BeES, SERVICES BeES, ENERGY BeES, PHARMA BeES, and REALTY BeES. The benchmark indices of these schemes would be CNX IT Index, CNX FMCG Index, CNX Services Sector Index, CNX Energy Index, CNX Pharma Index and CNX Realty Index respectively.

Currently there are 10 equity ETFs listed on the National Stock Exchange (NSE) and 12 on the BSE (Bombay Stock Exchange) while seven gold ETFs are traded on both NSE and BSE. 

Half a decade after ETFs became a rage in international markets, they are becoming more and more popular in India. But the question is among whom? While fund companies are launching more and more ETFs, the investing public continues to ignore this product category. A cursory glance at the volumes of ETFs listed on the NSE is a testimony to this fact.

On Tuesday (20th July), the total traded quantity of 10 equity ETFs stood at 1,67,854 units with a total turnover of just Rs5.24 crore on the NSE. The ETFs launched by Benchmark Mutual Fund -'NIFTYBEES' and 'JUNIORBEES' - were the two schemes which together contributed Rs5.08 crore of this turnover. HDFC Mutual Fund and ICICI Prudential Mutual Fund have also launched their gold ETFs.

The low trading volumes were reflected in the bid ask spread. The difference between the bid price and the ask price of Reliance Banking Exchange Traded Fund (ETF) - 'RELBANK' was Rs14 with bid price or buy price at Rs947 and sell price at Rs961.

Similarly 'PSUBNKBEES' had a spread of Rs5 with bid price at Rs388 and sell price of Rs393 on a turnover of just Rs40,000. At 2.50pm (20th July) on the NSE, UTI Mutual Fund's 'UTISUNDER' recorded only one trade worth Rs1,000. In the event of market volatility the difference between this spread will be even more. There is a direct co-relation between the spread and volumes. The lower the volumes the higher will be the spread (difference between selling price and buying price). Just as a matter of comparison, Nifty Index Futures trades at a spread of 10-20 paise on a price of over Rs5,400. In the options market, the liquidity and trading volumes are so high that the price difference is just about 30 paise.

The huge gap in bid ask prices was also visible in gold ETFs. For instance, the 'RELIGAREGO' order book had a buy price of Rs1,816.50 and sell price of Rs1,835, a difference of Rs18.50 with turnover of just Rs2.22 lakh. The assets under management (AUM) of all gold ETFs put together were marginally higher at Rs1,939 crore as on June 2010. The seven gold ETFs recorded a turnover of Rs17.35 crore on the NSE on 20th July with a total of 97,395 contracts traded.

"Index funds and ETFs are the best way to invest for a long-term perspective but they are yet to catch up in India. That is the reason why volumes are poor. There is no retail penetration. The volumes will not be there if there's no retail participation. Institutional volume is slowly picking up. A few banks which are open to the idea of buying ETFs are already doing some transactions," said RL Narayanan, vice president - equity & institutional sales, Bonanza Portfolio Ltd.

The concept of ETFs is new among retail investors. Industry experts cite poor commission as the primary reason behind the low awareness of these products. ETFs are cheaper for investors. An ETF carries 1.50% annual recurring expense compared to 2.50% which an equity fund can charge to its scheme. ETFs also do not carry an exit load unlike other schemes. As on June 2010, the AUM of ETFs stood at just Rs1,135 crore (excluding gold ETFs).

"Benchmark Mutual Fund is usually into ETFs so people are more aware about it. The awareness about other big fund houses which have launched ETFs in the recent past is not much. Even if they are aware they like to buy traditional equity funds. Buying a traditional fund is convenient than buying an ETF at the moment," said Y Jawahar, VP - head, distribution, Mata Securities. — Ravi Samalad