Continuing with the theme of ETFs this week, today I’m going to write about something that doesn’t impact Indian investors yet, but will surely impact them in the years to come.
Currently, the name of the ETFs pretty much lets you know what it means and there’s not much difference between different ETFs of the same category – for example you can look at the performance of any gold ETF over a certain period of time and find that all of them were fairly close in their performance.
This is because their underlying is the same and all of them buy the same gold, and it’s price movement is the same for everyone.
However, this won’t remain the same forever, eventually there will be fund providers who will create a gold ETF that doesn’t actually own physical gold but only replicates its performance by buying Futures contracts, and there may also be gold ETFs that own shares in the companies engaged in gold mining, trading or dealing with jewelery.
You will be amazed to see the variance in performance of these funds. While the best performing went up by about 50%, the worst performing went by just 22% or so.
OIH is a fund that invests in oil producing companies whereas USO is the ETF that tries to replicate the performance of oil with Future contracts.
The lesson here is that even though you’d think of both these ETFs as oil ETFs, the performance between them varies a lot, and before buying into any ETF you need to see what they are going to buy, and then keep an eye on how the fund is performing relative to its peers.
The big question here is how to know which fund will perform well without the benefit of hindsight, and apart from looking at a fund and finding consistent patterns I can’t think of anything else. This is probably another case where you can spread your investment between funds of different kinds and diversify a little.
Arif commented on yesterday’s post that I had misinterpreted the question, and it was in fact a question about variety of ETFs, and not Options on ETF.
I don’t know if I misinterpreted or not, since Amruta who originally posted the comment hasn’t responded yet, but I think that the question of which new ETFs should be introduced is an interesting one, and I’ve often thought about this.
Here is a list of 7 ETFs that I’d like to see launched in the Indian market. Apart from the silver ETF, I haven’t ever read about anything else being considered so think of these as just my wish-list, and not something that’s likely to be launched in the near future.
1. Silver ETF: There’s been a lot of interest in silver for the last year or so, and I think this is one ETF that a lot of people want. Like the gold ETFs, this will hold physical silver and will be like SLV that trades in the US.
2. Oil ETF: There are no oil ETFs in India, and I think this will also be a good product that will give people exposure to oil. It will be good if the oil ETF actually owned oil barrels, but I don’t know of any oil ETF in the US that does it, so I don’t know how feasible it will be to launch such an ETF in India.
3. Copper ETF: People say copper has a PhD in Economics since it tracks the economy so well, and I think this will be a good ETF as well. I’d like this to be similar to the gold ETF, and own physical copper instead of just owning stocks that engage in copper mining.
4. Canada ETF: I’ve always felt it strange that most of the international ETFs and mutual funds in India track other emerging countries and not developed countries. The stocks of developed countries are less volatile and have the scope of offering diversification to Indian investors who have to deal with a lot of volatility in their domestic market.
5. Germany ETF: Reasons are similar to the Canada ETF, and this is a developed and probably the strongest European country of the day. It may be a good idea to get exposure to this.
6. Australia ETF: In addition to being a developed country – Australia is big on natural resources, and a natural beneficiary of China’s rise, and this might be a good asset to own in the future.
7. INR – USD ETF: There are no currency ETFs right now, and this can be another area that can be useful for people, especially those who are invested in stocks abroad, and want some currency exposure as well.
So, this is my wish-list and some of the ETFs that I’d like to see in India; what about you? Which ETFs would you like to see launched in India?
This is another post from the Suggest a Topic page, and it’s about Options trading on ETFs, or rather the lack of ETF Options in India.
Here is Amruta’s comment.
ETF Options are widely traded in US markets. Would like to know ur take on their introduction in Indian markets? which etfs should they b introduced on?? Thanx..
I feel that it’s only a matter of time when Options are introduced on ETFs in India. In fact a few months ago there were plans to create Options on the popular Benchmark Gold BeeS ETF on NSE, but then the FMC (Forward Markets Commission) wrote to the NSE (National Stock Exchange) saying that they should have jurisdiction over Options trading on the commodity based ETF since they already regulate commodities future, and this is quite similar to that product.The launch was then stopped, and since then I haven’t read anything on the matter, but I think this will happen in due course, and after that Options on other ETFs will be launched as well.
I think that it’s good to have Options on these ETFs, as it allows people who are so inclined to take positions and test out their theory.
I have no doubt that a lot of people will lose money in trading Options, but that is no different than trading in stocks, and I’m sure there will be people who make money on them as well.
It also allows you to take short positions which you can’t do without Options. For example, currently, there are no easy ways for small investors in India to take a short position in gold if they’re so inclined but if there were Futures and Options on Gold BeeS they could have sold a Future or bought Puts.
Compare this with the US where a small investor can easily buy long dated Puts on either the popular gold ETF GLD, or even gold mining companies like ABX, and I feel that the Indian investor is at a disadvantage.
Options are not for everyone, but there is a segment of investors who understand these products, can use them, and even eagerly awaiting them, and I feel that it’s only a matter of time before which their wish is granted.
I first came across the concept of investing in fishing related themes on Roger Nusbaum’s blog a few days ago when he wrote about Global X launching a fishing ETF.
Global X has launched the first global fishing ETF in the US a couple of weeks ago.Â The FISN Global X Fishing Industry ETF trades on the NYSE Arca and it has around $3 billion in assets already!
Though Indian investors don’t have access to this ETF, I thought I’d write about it since it’s an interesting theme, and it’s good to be aware of such themes before (if at all) they become red hot. As you may imagine this type of fund draws extreme reactions from people. They either think it’s downright silly, or they think it makes perfect sense, so far I haven’t seen a lot of people in the middle.
It’s easy to see why someone may think this is a silly theme, so let me dwell on why people think this makes sense. The idea is that as a large number of people around the globe move to higher incomes and demand protein rich food – fishing related companies will be one of the beneficiaries of the trend.
To take advantage of that – FISN tracks the Solactive Global Fishing Index and the aim of the index is to track the performance of large global companies engaged in the fishing industry.
The index has 20 constituents out of which 18 companies are based outside the US. The index contains a mix of emerging and developed countries, and Norway and Japan are the two largest country components of the index.
Here is the weight of various countries in FISN.
As you can see, Norway and Japan form more than half of the index constituents, and the USD – YEN or USD – Norwegian Krone currency rate movement will seriously impact how the fund performs.
Toyo Suisan Kaisha, Ltd. engages in the purchase, distribution, and exporting of food products in Japan and internationally. The company operates in four segments: Seafood, Processed Foods, Cold-Storage, and Other.
The sun never sets on the ocean of Dongwon Industries. Dongwon Industries cultivates the oceans ranging from the Indian Ocean all the way to the Antarctic Ocean. The tuna that they catch in the worldâ€™s waters is kept under the temperature of -60degrees Celsius and delivered fresh to the customersâ€™dinner table. We export our marine products to Japan, United States of America, Russia and so forth, with the best quality, which proves the world recognition of our high-quality products.
The fund has an expense ratio of 0.69% so not very highly priced either. Â In summary, the fund has a lot of international stocks that are large companies in the fishing sector.
I have absolutely no clue how this will do in the future, but I think this is a very interesting theme, and one that is at least sure to capture the imaginations of people if not provide them good returns.
It’s also the kind of thing that people enjoy telling others that they invested in, so that may be another reason why the fund has grown in size so rapidly.
What are your thoughts? Do you think it silly or does it make sense to you?
This post is about ETFs listed in the US that allows American investors to invest in India. There are currently 7 such India ETFs, and the biggest among them is Wisdom Treeâ€™s India Earnings Fund (EPI), which is over 3 years old and has assets worth about $1.5 billion.
Powershares India Portfolio (PIN) is the second largest with over half a billion worth of assets under management.
You can take a look at all the seven India ETFs and see how they performed in 2010 in the table below.
(1 Year returns and dividend data taken from Google Finance)
The Direxion ETFs are leveraged ETFs that aim to give you double the daily returns of their index, and by their very nature are not suited for long term investing.
The Emerging Global Shares ETFs focus on small cap and infrastructure in the Indian space, and are only suitable if you want to bet on these specific areas of the market.
That leaves us with three funds â€“ EPI, PIN and INDY that an investor can look at if they want to invest in the broader Indian market.
Large overlap among India ETFs
The interesting thing about these funds is though they follow different indices there is a big overlap in terms of their top holdings and the sectors they invest in.
You can see how they share their top holdings from the chart below.
India ETF Top Holdings
These holdings are as on April 20 2011.
The holdings change for these funds but you can see that they do share a lot of common stocks and though the percentage varies, with the exception of SBI – all three have relatively big stakes in the same company.
Despite, this INDY has done much better than the other funds, but it’s anybody’s guess if it will continue to do so.
INDY’s performance made me look at how it performed against the index it was supposed to track and I was surprised to see the following chart.
As you can see INDY has beaten it’s underlying index by quite a margin!
I think this is because INDY has benefited from USD – INR exchange rate movement in the last year and while their holdings must have lagged Nifty performance by a bit (due to expenses) the currency movement has juiced up their returns and made them do better than their underlying index itself.
Conclusion on the Best India ETF
For most foreign investors – the larger question is probably whether you want to bet on the Indian market or not, but once you’re done making that decision – these 3 funds give you a good exposure and it’s hard to pick one over the other.
Personally, if I had to invest in an India ETF – out of the 7 currently present in this space – I would opt for INDY because it tracks a popular Indian index, comes from a well known fund provider, has low expenses, reasonable volume size, and has done a good job of tracking its index as well.
Disclosure: No investments in any ETF mentioned here.
The MOSt NASDAQ 100 ETF plans to track the NASDAQ 100 IndexÂ (NDX) of course, and this isn’t a fund of funds, which means that it will look to invest in the underlying stocks directly, and you won’t have to incur double fees.
The few other international funds I’ve seen so far are fund of funds which means double fees for investors as they bear the fee of the fund, and then the underlying fund as well.
While the SID (Scheme Information Document) does state this ETF can invest in other NDX based ETFs, it appears to me that for the most part the intention is to directly invest in the underlying stocks, and that’s a good thing.
The expense ratio of MOSt NASDAQ 100 ETF is 1% of recurring expenses, and that’s among the lower ones charged in the Indian ETF space, which is a good thing as well.
Having looked at the basic things, let me now explore 3 factors that are not easily apparent when you’re looking at this ETF, but are something that you should be familiar with.
The NASDAQ 100 Index
The first thing to do is to get familiar with the index itself. In this case the NASDAQ 100 Index, which comprises of 100 of the largest companies listed on NASDAQ based on market capitalization. Â These are primarily technology companies, but there are other companies like Vodafone, Whole Foods, Wynn Resorts in the index as well. The complete list can be found at the bottom of this post which I’ve taken from the SID itself.
Apple is by far the biggest constituent of this index with about Â 20.65% weight, and QUALCOMM is the second largest constituent with 5.03% weight.
Here is a pie chart that shows the top constituents along with their respective weights and you can see that the top 12 stocks make 50% of the index.
So, if I were to invest in this index I’d have to have a good feeling about the US technology market in general and these stocks in particular – at least about Apple.
Exchange Rate Movements
Since this ETF will raise money in INR and then invest it in USD – that exposes it to exchange rate fluctuations, and this is something you need to keep in mind or it might surprise you later.
From the risk factors in the SID:
As the Scheme will invest in securities which are denominatedÂ in foreign currencies, fluctuations in the exchange rates of theseÂ foreign currencies may have an impact on the income andÂ value of the Fund.
To understand this think of a situation where this ETF didn’t exist and you wanted to invest Rs. 90,000 in the NASDAQ 100 Index.
You’d give this money to your cousin in US and ask him to invest it on your behalf. The current exchange rate is about 45 rupees to a dollar, so this will amount to approximately $2,000 with which your cousin buys the ETF.
Let’s suppose the market stagnates for a year, and the NASDAQ 100 doesn’t move at all. Your patience runs up, and you ask your cousin to sell the holding and send you the money.
Your cousin sells the holding and gets the $2000 back, but the exchange rate has now moved to 1 USD = 40 INR, so that $2000 only translates to Rs. 80,000.
So even though the index didn’t move at all you made a loss due to exchange rate movement. The reverse is also true and if the exchange rate moves to 1 USD = 50 INR you will stand to gain.
This will be true for any international ETF and is more of a feature than a bug. Just be cognizant of this factor when investing in the MOSt NASDAQ ETF.
This ETF is treated as a scheme other than an equity oriented fund for taxation purpose, and that’s probably a drawback given that equity funds are treated more favorably for tax purposes, and your investment really is equity investment.
This is an interesting product, and the people I’ve spoken to who’re interested in this product were primarily looking to diversify their equity holdings a little bit by investing in the equity of a developed market. If that’s your goal with it then I suggest that you also enable foreign trading on your equity account and see what options you have there. I’m not very well familiar with that option, but it does exist.Â If you were inclined to take a position on US technology stocks then of course this is a fit for you.
As always – I won’t make any recommendations on whether you should buy it or not, but if you had any other questions or observations please leave a comment.
There are several gold ETFs in India, and with the exception of Quantum – 1 unit of every gold ETF represents 1 gram of gold. If that’s the case then why does the price of these gold ETFs differ?
Shouldn’t they be exactly the same?
No, they shouldn’t, and before you get to the reasons why they shouldn’t – it’s important to understand that the last traded price of an ETF is not the same as its NAV.
Don’t compare the last traded price of one ETF to another
A gold ETF owns the following assets:
Debt and other liquid instruments
The combined value of these assets divided by the number of units in the gold ETF constitute the NAV of the ETF.
The NAV of a gold ETF can be seen on its website, so you can see that the Benchmark gold ETF GOLDBEES had a NAV of 1975.26 on 13th December from their website.
However, since an ETF trades in the stock exchange and there is a different price at every tick the price of the ETF can be different from its NAV. The NSE website shows that the last traded price on that day for GOLDBEES was Rs. 1965.25.
This means that the ETF was going at a discount of about Rs. 10 at that point. There are big market participants who are engaged in actively trading the ETF to bring the market price closer to the NAV and gain from any arbitrage opportunities available.
I’ve seen a few people comparing the last traded price of one gold ETF to another, and concluding that the lower priced one is cheaper, but that’s absolutely wrong because the last traded price is largely dependent on the NAV, and the NAV is in turn dependent on the assets a gold ETF owns, so comparing one with the other does you no good.
A cheap ETF based on price will be one which is trading at a significant discount to its NAV, but the chances of finding that for a retail investor are really slim, so I won’t worry too much about it.
With that in mind, let’s look at the reasons why prices between various gold ETFs vary.
I’ve already touched upon the first reason which is the fact that ETFs are actively traded, so prices will differ due to the trading at that point in time.
All ETFs have expenses that are paid out by selling gold holdings or using the income from their debt holdings, so although theoretically one unit of a gold ETF represents a gram of gold – in reality the gold holdings are slightly lower due to the expenses. The higher the expenses, the lower would be the NAV, and consequently the trading price of the ETF.
A good example of this is the Reliance gold ETF which had a NAV of 1920.20 on 13th Feb 2011, and was trading at Rs. 1913 on that date.
Compare that to Benchmark GoldBEES price of Rs. 1965.20, and you might think that Reliance is cheaper than GoldBEES, but in fact the opposite is true because Reliance charges higher expenses than Benchmark!
Higher expenses means less lower returns for you, and a fund with lower expenses is better for you.
So, expenses eat into the NAV of the various ETFs, and affect their prices.
Composition of assets
Gold ETFs not only hold gold bars, but also debt instruments and cash for some liquidity, so that makes a difference to the NAVs of the different ETFs. I don’t know how much of a difference this factor makes, but I’d think this factor plays a larger role than active trading, but a smaller role than the expenses that are paid out.
These three factors contribute to the variation in the prices of the different ETFs, and if you are looking for a cheaper gold ETF then you should compare the expenses that different fund houses charge instead of the price at which they trade.
You should also check out my post on the best gold ETF to get a perspective on the factors you should consider before deciding on what ETF to buy.
I got a slight variation of this question in a comment the other day. Right now there isn’t an oil ETF in India (see oil ETFs listed in USA), and I couldn’t find any mutual funds that track crude oil prices also. If you know of any, please leave a comment or email me, and I will include them in this post.
There are several mutual funds that invest in oil and energy related companies, so that is one way of getting an exposure to crude. But then again, there could be a situation where oil prices rise, and your mutual funds don’t, especially in India where the oil companies absorb some of the price rise from being passed on to the customer. So doing this may not be a good way of tracking oil prices.
I can think of two other ways of tracking crude oil in India, but I don’t have any experience in either one of them, so I don’t know how far this is feasible or what the pros and cons might be. If someone has a first hand experience in either of these then please leave a comment or send me an email.
1. Commodity Trading: The first way is by commodity trading, and buying Brent Crude Oil Futures or Crude Oil futures in one of the commodity exchanges in India. A lot of brokers allow this facility, but you have to request access to this individually, and on approval, this facility will be activated.
2. Buy overseas Oil ETFs: Some time ago, Indian brokerages opened up the facility to buy international stocks by opening up “Overseas Trading”, and this may be another way of getting exposure to oil. Get this facility open for you, and buy oil ETFs trading abroad.
Again, let me emphasize that I have no experience of either of these methods, and I don’t know how far they’re going to work, these are just ideas that I had, and if anyone has any practical experience with trading oil in India, then please share.
The price of mutual funds depend on the price of the stocks they hold, and the price of a gold ETF depends on the price of gold.
If gold prices fall then price of gold ETFs will fall, and there will be a loss on your investment. So, the fall in the price of gold is one of the main risks you need to worry about.
Now, it is quite likely that folks are telling you that gold prices never fall, it is an ultra safe investment, countries around the world are debasing their currency by printing money, the days of fiat money are over, this time is different therefore gold will never fall in value, and by virtue of that gold ETFs are risk free, but these are merely opinions.
Gold prices can continue to rise, or they can drop like a stone – no one knows for sure – remember that a lot of people thought that house prices never fall, but look what happened there.
There is risk in gold investment, especially now when retail investors are so keenly interested in it, and you should tread this with caution, you can make money, but you can lose money as well.
The original comment also had a question on how can you buy a gold ETF, which is answered here, and another one on how much profit should be expected, and I can honestly say that if I knew how much profit is to be expected then I wouldn’t waste my time writing this blog.
I included an ETF that invests in both China and India when I first created the India ETF list because there were just so few that focus solely on India.
Since that time, there have been quite a few additions in this space, and now you see a much greater variety – there is an ETF that tracks Nifty, one that invests based on its own methodology, an ETN, leveraged ETFs, one that invests in infrastructure, and another one in small caps.
There are 7 ETFs and 1 ETN that solely focus on India, and Wisdom Treeâ€™s India Earnings Fund is easily the biggest with assets under management of 1.18 billion dollars. It also happens to have performed the best year till date with 11.71% returns.
Here is how some of the other India ETFs have performed. I have updated the original India ETF list with the new ones, so you can read details about any of these funds on this page.
Wisdom Tree India Earnings Fund
PowerShares India Portfolio
iPath MSCI India Index ETN
iShares S&P India Nifty 50 Index
EG Shares India Infrastructure
Released â€“ August 2010
EG Shares India Small Cap
Released â€“ July 2010
Direxion Daily India Bull 2x Shares
Released â€“ March 2010
Direxion Daily India Bear 2x Shares
Released â€“ March 2010
Here is how these ETFs have moved in the last two years (or since they were released).