Liquidity : A Key Factor for ETFs
Cover Story
follow the big benchmarks . Seeing the writing on the wall , both the NSE and the BSE are constantly designing interesting indices on which new ETFs can be constituted . India Index Services and Products Limited ( IISL ), a group company of the NSE , has been launching new and innovative indices across multiple strategy and asset classes .
For instance , the gold ETF has been very popular , which allows the investor to buy units where the underlying security is gold . The first ETF in India was launched in December 2001 , which was benchmarked to Nifty 50 index . In India , the AUM of equity ETFs has grown around six times in last two financial years ( ending March 31 , 2017 ). In FY11 there were 11 equity ETFs with `1,976 crore assets under management ( AUM ). At the end of September , ETFs AUMs touched `53,609 crore . In India , the largest ETF is the Nifty 50 based ETF issued by SBI Funds
Many investors are wary of active fund managers and their adventurous investments . An investor of ETF knows exactly where the money is invested and that too at reduced cost . In an ETF , the cost of distribution goes away as funds are traded on the exchange .
Ashishkumar Chauhan CEO , BSE
Management and at the end of September , SBI ETF Nifty 50 had `24,067 crore in assets .
Another factor that has given a boost to this asset class is the government ’ s divestment process through the ETF route . The government launched its CPSE ETF in March 2014 with an issue size of `3,000 crore . A second edition of the CPSE ETF with an issue size of `6,000 crore was launched in January 2017 by Reliance Nippon Life Asset Management . Through the third tranche , the central government mopped up over `2,500 crore . Interestingly , the government gave an upfront discount of 3-5 per cent to investors for ETFs like CPSE and Bharat-22 ETF . The funds charge very low management fee . Bharat-22 ETF charges less than one basis point . Even though ETFs are not so popular with retail investors in India , globally they are the vehicle of choice for both institutions and
Liquidity : A Key Factor for ETFs
Regarded as one of the key features that give exchanged traded funds ( ETFs ) an upperhand over regular mutual fund schemes , liquidity lends this advantage to ETFs through two sources – primary and secondary . In the primary market , the authorised participants ( APs ) or market makers ( MMs ) transact directly with the issuers of ETFs to buy as well as redeem their ETF holdings . In the secondary market , liquidity originates from the continuous buying and selling of ETF units traded on the exchanges , with
Indicative Net Asset Value ( iNAV ) – the underlying value of an ETF unit – as the core metric . Adequate trading volumes on the exchanges hold the key to creating ample liquidity for investors .
Put simply , retail investors can access ETFs through two routes – NFOs and the stock exchanges , once they are listed . For example , the central government floated NFOs for the marquee CPSE ETF and Bharat-22 ETF schemes , post which the former was listed for trading on the bourses . Now , the government has raised nearly `14,500 crore through the Bharat-22 ETF .
High liquidity is considered an attractive proposition as it provides investors an opportunity to stay or exit their investment positions at fair values , with minimal risk and expense . “ ETF liquidity gives investors the flexibility to enter and exit the investment . The more the liquidity , the finer are the prices that are offered on the exchange thereby ensuring more flexibility ,” says Koel Ghosh , Head — Business Development , S & P Dow Jones Indices in South Asia .
by Himali Patel
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Outlook Money December 2017 www . outlookmoney . com