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Investments are moving from index funds to ETFs

Investments are moving from index funds to ETFs
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First Published: Sun, Dec 27 2009. 09 58 PM IST

Sanjiv Shah, executive director, Benchmark Asset Management
Sanjiv Shah, executive director, Benchmark Asset Management
Updated: Sun, Dec 27 2009. 09 58 PM IST
Volumes for Junior BeES have not gone up as much as Nifty BeES. Are you happy with the penetration of exchange-traded funds (ETFs) in India?
Sanjiv Shah, executive director, Benchmark Asset Management
We are quite happy. The number of investors has increased nearly four times in the last six months due to low cost, underperformance of active managers, change in distributor remuneration and so on in managed funds. It’s a long way to go, but ETF awareness is growing daily.
Do you think it’s a handicap that ETFs are not available through agents, who usually do not recommend this product?
It is, but many distributors do not sell even index funds since they don’t earn them much income. So, it does not hurt us much. In fact, we believe that exchange brokers will become an important channel in the future and will embrace ETFs. On the New York Stock Exchange, ETFs occupy the top six slots among the top 10 traded securities and ETFs now are nearly 40% of the volume. This will happen in India, too. Also, the changes in the way distributors are going to be paid will drive them towards an advisory model and ETFs would be a natural asset class.
With index funds getting smarter with lower costs, does ETF investing still make sense?
Photo: Hauryoshi Yamaguchi / Bloomberg
I don’t agree. The costs of Nifty-based index funds are still high as compared to Nifty ETFs (1.50% against 0.50%). The tracking error of most funds as compared to Nifty BeES is still high. Also, ETFs are structurally superior products than normal index funds. The worldwide trend also reflects that investments are moving towards ETFs as compared to normal index funds.
People aggressively bought gold despite new price highs recently. Is gold still shiny?
We need to see this in the context of investments by Indians into gold. Remember, Indians are one of the largest investors in gold (800 tonnes every year). Also, the prices are set internationally and the huge quantitative easing by international central banks is driving investment into gold worldwide. The good thing is that Indian investment is moving from physical gold to ETF’s.
Gold mining or gold price-linked ETFs, what do you like?
If you look at the returns from gold and from gold mining company funds, investors have gained 20% more by investing in Gold BeES as compared to gold mining company funds. Globally, investment into gold ETFs is close to $45 billion against $5 billion into gold mining company funds. So, investment preference and trends are clear. Gold ETFs are the best way to take gold exposure. Investors should have 10-15% of their portfolio in gold.
kayezad.a@livemint.com
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First Published: Sun, Dec 27 2009. 09 58 PM IST