Category: ETF

Benchmark Funds is launching the first international ETF in India: the Hang Seng BeES ETF. This is an ETF that will track the Hang Seng Index of Hong Kong by investing in stocks in the same proportion as the Hang Seng Index. The Hang Seng Index has 42 constituents, and a few are well known in India like HSBC Holdings, Hutchison Whampoa and Cathay Pacific. The ETF may also invest in mutual funds or ETFs that track the Hang Seng themselves.

This is a passive fund, which means that it will try and replicate the returns of the Hang Seng index rather than actively manage and beat them. However, due to fees and other factors, it will not be able to track the index returns exactly.

The expense ratio of the Hang Seng BeES ETF is expected to be 1.50% of weekly net average assets which is a tad high for a passive fund by international standards, but in India the expense ratios tend to be higher.

Keep in mind that this fund might invest in other ETFs and mutual funds, so in a way you might have to pay the expenses of this fund, and then indirectly the expenses charged by the ETFs and mutual funds owned by this fund.

The other thing to keep in mind is that since this ETF invests in foreign securities, – you are subject to foreign exchange fluctuation risk in addition to the usual risks you face while investing in equities.

It is interesting to note that ETFs are entering the International space too; in the past I have written about the MIRAE Asset Korea Discovery Fund and there have been other mutual funds that offered international exposure, but this is probably the beginning of a new trend of International ETFs in India.

Disclosure: This is just a summary of the Hang Seng BeES ETF, and is not a buy or sell recommendation.

The Reliance Liquid ETF will be the second liquid ETF to be launched on the NSE. The Liquid BeES being the first one.

This is an ETF that will invest in a portfolio of short term government securities, money market instruments, and other debt securities of short and medium term maturities.

The minimum application amount during the initial offer will be Rs.5000. After it lists, you can buy it from the stock exchange, and there is really no minimum limit outside of what your broker imposes for a particular trade.

The fund plans to charge expenses to the tune of 2.25% of weekly average net assets, which seems a bit high to me, especially because this fund is going to invest in short term securities which generally have smaller returns, and this fee can eat into those returns quite easily. Compared to this, Liquid BeES has an expense ratio of 0.60%, which is significantly cheaper.

Personally, this kind of thing makes me want to wait and watch, and see how the fund develops over the years. There is not enough information right now to tell you that the extra money you pay in fee will result in superior returns, so why pay more right now?

You also don’t know whether a market will develop for the Reliance Liquid ETF, and whether there will be active buying and selling in the secondary market for this ETF. If an active market is not formed, then that could mean not getting good quotes for your investments, and that’s not good at all.

I really can’t think of any good reasons for getting into this NFO, but if you have one, — do leave a comment.

Disclaimer: This is just my personal opinion, and not investing advice of a professional money manager that you could follow.

Last July I wrote a longish post about two exotic ETPs – Macroshares UMM and DMM, which were a 3X leveraged ETP, for the housing market. These were similar to an oil ETP (UOY), which terminated early, and I am not surprised to hear that Macroshares UMM and DMM have also been terminated early.

A commenter – Bob Shreve had a clever comment on the last post:

I think these micro-niche products should have been called UMM and DMMER.

And it looks like his observation was right on the money.

A few people thought that this complex instrument can hedge their exposure to their houses, but in the end, it wasn’t much help.

I am always wary of complicated financial products and this will further push me away from them.

The Reformed Broker had a very good post about these in July, and another excellent post today. Here is what he said today:

In a screed back in July of 2009, I let loose on this misguided attempt to attract casino capital to an investment product that made absolutely no sense structurally or thematically.  These products, as created, were not a hedge against a homeowner’s own house, nor were they particularly robust enough to work as trading vehicles.

Here’s what I said at the time:

Why am I so angered by the fact that these Frankenstein creations were permitted to slither out of the freakshow tent they belong under?

How about these factors for a start:

Lack of serious price discovery?  Check.

Lack of actual underlying real estate holdings?  Check.

1.25% expense ratio?  Check.

Disclaimers in the prospectus that absolve these instruments of any responsibility for not being able to perform the way they are supposed to?  Check.

The good news is that both UMM and DMM (aka Up and Down) were quietly shut down at the end of last year.  I would congratulate MacroMarkets (the funds’ creator) for doing the right thing, but upon further investigation, it turns out that there was a clause that required the funds to manage a minimum amount of capital to continue trading, which they could not raise.

The entire post is worth checking out, and just for the heck of it, if you didn’t read my earlier post, check that out to get a sense of how this product was supposed to work.

Tata is coming out with a new fund offer for its own gold ETF – Tata Gold Fund. The new units will be priced Rs.100, and trade in stock exchanges like other ETFs.

The Tata Gold ETF will hold physical gold or gold related instruments as the majority of its holdings. They plan to hold at least 90% of their assets in gold, and the remaining in money market instruments, bonds, securitized debt, and other debt instruments permitted by SEBI.

This is a passive fund, which means that the fund manager will not try to beat the returns of gold, but try and replicate it for the most part.

The recurring expense ratio of the fund is expected to be 2.50% of average weekly assets for the first Rs.100 crore. This is similar to what most other gold ETFs in India have to offer, with the exception of Benchmark mutual fund’s gold ETF, which charges an expense ratio of 1%, and Quantum gold fund’s gold ETF, which charges an expense ratio of 1.25%.

The minimum application amount during the Tata Gold NFO will be Rs.10,000 for retail investors. It is worthwhile to keep in mind that since this is a mutual fund NFO, and not a stock IPO, investors shouldn’t think about any sort of listing gain from this.

If you were looking for a gold ETF, then there is one more option for you to invest in. This fund is not really all that different from other gold ETFs that hold physical gold, so I wouldn’t really be all that excited about its launch.

I can only hope that all these new gold ETFs that are getting launched in the market bring down the fees that mutual funds charge investors. At 2.50%, this is quite high compared to the western gold ETFs, and one can only hope that time and competition brings this charge down.

Disclosure: This is just a summary of the new fund that will be launched, and not a buy or sell recommendation.

There are 4 ETFs that give you exposure to water as an asset class. The ETFs that focus on water invests in stocks of companies that are primarily engaged in the water industry.  Within these 4 ETFs, there are ETFs that give you exposure to global water companies as well.

If you were looking to invest in water, then here is a list of 4 ETFs that can give you that exposure. If you are interested in green ETFs in general, then this page has the list of green ETFs.

Water ETF	Type	Gross Expense Ratio
Invesco PowerShares Water Resources Portfolio (PHO)	This water ETF invests in ADRs and stocks that focus on provision of potable water, treatment of water, and the technology and services that are directly related to consumption of water.	0.64%

Invesco PowerShares Global Water Portfolio (PIO)

This water ETF seeks to invest in a group of global technology companies that focus on the provision of the potable water, treatment of water, and the technology and services that are directly related to consumption of water.

0.75%

First Trust ISE Water Index Fund (FIW)	This ETF invests in stocks of 36 companies that derive a substantial portion of their revenues from the potable and waste water industries.	0.60%
Claymore S&P Global Water Index ETF (CGW)	This fund invests in 50 stocks from the S&P Global Water Index. The index has identified water stocks in two clusters – 25 water utilities and infrastructure companies, and 25 water equipment and materials company.	0.70%

This question has popped up in comments and emails a few times now, and I think it is time to write a quick post on it.

Many Indian investors take advantage of Systematic Investment Plans (SIPs), — and regularly invest in mutual funds. This is –  good investing habit — because it lets you invest a portion of your income every month, and builds up your savings.

ETFs are like mutual funds in some ways, so it is natural for investors to wonder whether or not they can invest in them through SIPs.

Generally speaking, you can’t invest in ETFs by setting up SIPs. I say generally because I know that at least Kotak Securities has something called – Auto Invest, which is their attempt at creating something like a SIP for investing in ETFs. I am not sure how it works, so I will not be able to comment on it, but in general, — you can’t invest in ETFs – gold or otherwise, through SIPs.

Even though, there are no ready-made SIPs to invest in ETFs, replicating one should not be too difficult. You already want to invest regularly, so you have overcome the hardest hurdle already. The next question is where, and you obviously have that figured out too, so all that remains is the operational part of it.

If you trade with an offline broker, you can tell him or her to set up a reminder and they will be happy to call you every month that day, and make the trade for you. I’ve heard that Sharekhan has an option where they send you reminders and such, but I haven’t used that, so can’t really comment on it.

If you are online, then you could set up a reminder on Outlook, or Gmail or something else on your pay-day, and invest yourself. This shouldn’t take more 5 or 10 minutes of your time, and should work just as well as an SIP.

I’d be interested to hear your ideas on how this can be done more efficiently, or if there are any particular problems you face doing this.

Patrick J left an interesting comment last week about a portfolio with a certain asset allocation. This is what he had in mind:

30% — Large Cap,

30% — Europe,

10% — Small Caps,

10% — Emerging,

10% — Bonds and

10% — China

So, I tried creating a portfolio with ETFs that had these components to see how well it did in the last five years.

I did this in a pretty unscientific manner by going to the iShares website, and finding ETFs that correspond to these descriptions. I didn’t look for the lowest cost ones, or the ones that made the most sense. I could give a number of reasons for not doing that; but in fact, I took the easy way out for this.

With that in mind, here are five ETFs that I think will work for this purpose and their annualized returns in the last five years.

Type	ETF	Return
Large Cap	S&P 500 Growth Index Fund (IVW)	1.51%
Europe	MSCI EMU Index Fund (EZU)	7.38%
Emerging	MSCI Emerging Market Index Fund (EEM)	17.20%
Small	Morningstar Small Core Index Fund (JKJ)	3.27%
Bonds	Barclays Aggregate Bond Fund (AGG)	4.92%
China	FTSE Xinhua China Index Fund (FXI)	20.83% (This is the return of the underlying index)

These returns are no surprise, and since past returns are no guarantee of future returns, you shouldn’t extrapolate this too much. The thing that pretty much jumps out is that you had to be in the emerging markets to make good money in the past five years. Will the next five be like this? – I have no idea.

This exercise amazed me with the number of options I had. Within iShares itself, there were several funds that are categorized as small caps, emerging nations etc. and there are several other ETFs and mutual funds that offer the same type of funds.

It is difficult to select which fund to select even if you have a good idea of what you want to start with.

I think you have to think of at least three things before deciding to buy a fund:

Fund Type: I think fund type will probably be the first parameter. So, if you are looking to invest in Europe, do you want to invest in just the developed part, the emerging part or the entire continent? With that in mind, you can narrow down your choices.

Cost: Once, you have that laid out, the next thing is to look at cost or expense ratio of the funds.  You want to make sure you get the fund with the lowest expense ratio as compared with its peers.

Volume: You also want to make sure that the fund has sufficient volumes, and you will be able to get out easily if the need arises.

I am sure there are several other factors, but these three are the minimum that I’d look at, if I had to get into any of these funds.

Here are the ETFs that track the S&P 500 right now.

1. SPDR S&P 500 ETF (SPY):  The SPDR S&P 500 ETF is a mammoth ETF which was created in 1993. It is low cost with a net expense ratio of just 0.0945%.
2. iShares S&P 500 Growth Index Fund (IVW): This is another ETF that tracks the S&P 500, and has an expense ratio of 0.18%. This one has an inception date of 05/22/200.

Apart from these two regular S&P 500 ETF, — Proshares offer you leveraged ETFs that are double long and double short on the S&P 500.

1. Ultra S&P 500 ETF (SSO): ProsShares Ultra S&P 500 ETF seeks daily returns that correspond to twice the return on the index for a single day.
2. UltraShort S&P 500 ETF (SDS): This is a daily leveraged inverse ETF that corresponds to twice the opposite of daily performance of S&P 500. It has a net expense ratio of 0.91%.

S&P 500 Index

The index itself contains 500 leading companies in the leading industries in the United States. As on September 30^th 2009, these were the top ten holdings of the index.

Stocks	Holding Percentage
Exxon Mobil	3.53%
Microsoft Corp	2.15%
General Electric	1.87%
JP Morgan Chase & Co.	1.85%
Procter & Gamble	1.81%
Johnson & Johnson	1.80%
Apple Inc	1.78%
AT&T	1.71%
IBM	1.68%
Bank of America	1.57%

Here is a breakdown of S&P 500 based on sectors. Source: S&P 500 Factsheet

I have tried to compile a comprehensive India ETF list. This contains all ETFs available to Indian investors currently. All these trade on the National Stock Exchange, and if I have missed any, please let me know.

India ETF: Equity

Nifty BeEs: This is an index ETF that tracks the Nifty, which means that it holds the stocks in the same proportion as they are present in the Nifty index. It has an expense ratio of 0.50% as on 29^th May 2009.

Junior Nifty BeEs: This is an index ETF that tracks the performance of the CNX Junior Nifty index. It has an expense ratio of 1%.

Bank BeEs: This is an index ETF that tracks the performance of the CNX Bank Nifty. It has an expense ratio of 0.50% annualized.

PSU Bank BeEs: This is an index ETF that tracks the performance of CNX PSU Bank Index. It has an expense ratio of 0.75%.

Shariah BeEs: This is an index ETF that tracks the CNX Nifty Shariah index. The expense ratio of this ETF is 1.00% annualized.

S&P CNX Nifty UTI Notional Depository Receipts Scheme (SUNDER) ETF: This is an Index ETF that tracks the S&P CNX Nifty.

Kotak PSU Bank ETF: This is an index ETF that aims to provide returns corresponding to the CNX PSU Index. It has an expense ratio of 0.65%.

Reliance Bank Exchange Traded Fund: This is an index ETF that tracks the CNX bank index. It has an expense ratio of 0.80% up to Rs. 500 crore of assets, and 0.70% beyond that.

Quantum Index Fund QNIFTY ETF: This is an index ETF that tracks the performance of the CNX Nifty. It has an expense ratio of 0.75%.

India ETF: Liquid

Liquid BeEs: Liquid BeEs invests in a basket of call money, short-term government securities and money market instruments of short maturities while maintaining safety and liquidity. It has an expense ratio of 0.60% annualized.

India ETF: Gold

Here is the list of all the gold ETFs in India from an earlier post.

Name	Expense Ratio	Pricing Per Unit	Inception Date
Benchmark Mutual Fund – Gold Benchmark Exchange Traded Scheme	1%	Approximately 1 gram of gold	07 – March 2008
UTI Mutual Fund – UTI Gold Exchange Traded Fund	2.5%	Approximately 1 gram of gold	3rd Jan 2007
Kotak Mutual Fund – Gold Exchange Traded Fund	2.5%	Approximately 1 gram of gold	21st June 2007
Reliance Mutual Fund – Gold Exchange Traded Fund	2.5%	Approximately 1 gram of gold	1st November 2007
Quantum Gold Fund – Exchange Traded Fund	1.25%	Approximately half a gram of gold	27th February 2008
SBI Mutual Fund – SBI Gold ETF	1.50%	Approximately 1 gram of gold	30th March 2009