India joined the club of developed markets by launching
Nifty BeES, the first exchange-traded fund (ETF) from
Benchmark Asset Management Company (BAMC). The ETF was
listed on the capital market segment of the National Stock
Exchange on 8 January 2002. Incidentally, with this
listing India has become the first emerging economy in
Asia to launch an ETF.
Nifty BeES tracks the Standard and Poor (S&P) CNX
Nifty Index and hence those invested in all the 50 scrips,
which constitute the S&P CNX Nifty Index in the proportion
of weightage given to them in the index. The minimum investment
for taking the index exposure through Nifty BeES is just
one unit (around 1/10th of Nifty).
BAMC made a maiden public issue (closed on 18 December
2001) for Nifty BeES and collected Rs 21 crore. Seven
NSE brokers have been designated as authorised participants
who, as is the international practice, will perform the
role of the market-maker.
Says Benchmark Trustee Company chairman Dr S A Dave: "ETFs
have the potential of being extremely popular with investors
and can reap good volumes. It also provides with an additional
instrument of investing, generating higher liquidity and
volumes similar to instruments in some advanced countries."
ETFs are the latest and the fastest-growing mutual fund
product in the world. There are over 200 ETFs worldwide,
consisting of around US$100 billion in assets under management.
Over 60 per cent of the volumes of the American Stock
Exchange are from ETFs.
BAMC is India's first and currently the only company to
focus exclusively on the passive and quantitative asset
management business. In fact, BAMC is the first Asian
(except Japan) and just the 18th company worldwide to
ETFs represent shares of ownership in either fund, unit
investment trusts or depository receipts that hold portfolios
of common stocks, which closely track the performance
and dividend yield of the specific index, either the broad-market
sector or international. ETFs give investors the opportunity
to buy or sell an entire portfolio of stocks in a single
security, as easily as buying or selling a share.
They offer a wide range of investment opportunities. While
similar to an index mutual fund, ETFs differ from mutual
funds in significant ways. Unlike index mutual funds,
ETFs are priced and can be bought and sold throughout
the trading day. Furthermore, ETFs can be sold short and
bought on margin. It can also be bought or sold through
a broker of your choice, just as you buy a stock.
According to brokers, ETFs make it easy for one to buy
or sell shares throughout the trading day as against traditional
index mutual funds that can generally be purchased or
redeemed only at an end-of-day closing price. Moreover,
one can purchase as little as one share for most ETFs.
Indexing, often called passive management, involves
investing in a group of stocks that represent the composition
of the broad-market sector and the international index.
Index funds offer market-level performance; they aim
to consistently match the market performance of a specific
index nothing more, nothing less in advancing or declining
markets. Indexed investments may outperform most actively-managed
funds over the long term, and generally have lower management
and expense fees.
Lets look back at the history of the emergence of such
funds. ETFs were created by large investors and institutions
in block-sized units of shares (or multiples thereof)
known as creation units of a respective ETF. A creation
requires a deposit with the trustee of a specified number
of shares of a portfolio of stocks, closely approximating
the composition of a specific index and cash equal to
accumulated dividends. Similarly, block-sized units of
ETFs can be redeemed in return for a portfolio of stocks,
approximating the index and a specified amount of cash.
Actually the introduction of ETF in India has been hyped
for almost two years. The Bombay Stock Exchange in a joint
effort with the Unit Trust of India had announced Sensex
UTI Notional Depository Receipts (Sunders), the desi
version of similar globally-known funds like SPDRs, Webs,
Diamonds and Cubes that track S&P500, MSCI, Dow Jones
and Nasdaq-100 indices respectively. However, due to some
reasons, the proposed Sunders did not materialise.
ETFs are passively-managed funds that track a particular
index and have the flexibility to trade like a common
stock. ETFs combine the attributes of a mutual fund with
those of a stock. These are excellent cash products for
average investors that offer them an entire range of index
stocks as a package, without insisting on large investments.
ETFs also offer hedging and arbitrage opportunities. Investors
can go long or short in ETFs to hedge against possible
losses in equity exposures. There are also real time arbitrage
opportunities between cash, futures and ETF markets. Moreover,
ETFs have no compulsory redemption dates, allowing investors
to hold on to their positions for as long as they want.
ETF products are different from an index fund in more
ways than one. Unlike an index fund, where units are issued
in return for cash and redeemed as per the NAV value in
just cash, an ETF issues units in lieu of shares and vice
Unlike again an index fund, ETF unit-holders have beneficial
rights in the underlying shares that can be redeemed once
a week at the NAV-based prices. The only exit route in
an index fund is selling at NAV-based prices at the end
of a trading session. But ETF unit-holders can exit any
time during the day and consequently have access to easy
liquidity at the market prices.
The proponents of ETFs are highly confident about getting
a broad-spectrum retail participation in ETF from the
secondary market. Retail investors are free to trade Sunders
throughout the trading session by placing buy-or-sell
orders through their brokers, just like any other listed
scrip and that too in a Demat form. Thus, the marketable
lot is one unit, keeping the fund within the reach of
"Even shares held long-term by institutions can now
be converted into ETF units while continuing to hold the
beneficial interest in the shares, even as ETF units are
freely traded on the bourse. Obviously, this could unlock
the huge underlying value in these stocks," a broker
There could be a snag in the concept, though. Unlocking
of crores worth of individual corporate stocks that FIs
hold in Nifty
or the proposed Sensex for Sunders units could immediately
make the stockmarket and the Sensex crash.
"Any move of this nature could and perhaps would
instantly result in a hue and cry within the industry,
which still feels secure that a substantial chunk of stocks
lie safe with institutions and banks. Moreover, although
the safety factor increases several notches, returns from
ETFs, or for that matter any mutual fund units, can never
be the same
as that from an equity," the broker said.