Benchmark AMC plans 2 more ETFs

Spurred by the success of India's first exchange traded fund (ETF) Nifty BeES, Benchmark Asset Management Company is planning to launch two more ETFs based on information, communication, entertainment (ICE) index and midcap stock index.

"We are in talks with the National Stock Exchange in this regard and we expect to introduce both the new products in next three months," Sanjiv Shah,  executive director, Benchmark AMC said.

This is significant considering that the ETF, which tracks the 50 stock S&P CNX Nifty, is another instrument for arbitraging between the cash and derivatives market. Two new products though may not enjoy such a benefit, it will provide arbitrage opportunity between individual stocks and the ETF. Nifty BeES is seen as being more convenient than the cumbersome basket trades because the problems for contango and backwardation situations can be avoided.

Since the ETF has the inherent capability of passive investment, it relieves fund managers and investors of the day-to-day performance stress of his portfolio. Passive investing is an investment strategy where a portfolio is constructed and maintained as per a predefined strategy or to replicate a benchmark index.

Moreover, since ETF is transparent, one knows upfront in which stocks the money is being invested. This helps in accurate asset allocation in the portfolio and reduces active management risk, that is, the subjective bias of a fund manager.

However, the limited conversion of the portfolio is significant because of the tracking error, so natural to such investment instruments may result in lower returns. "Tracking Error" is the annualised standard deviation of the difference between daily returns of the index and he NAV of the Scheme. However, many times it is interpreted as over / under performance.

Factors such as fees and expenses of the scheme, corporate actions, cash balance, changes to the underlying indices and regulatory policies do sometimes deviate the returns from close correlation with the underlying index, Ranjan Mehta, executive director Benchmark AMC said.

Since operating an index mutual fund involves no decision making, there is little for an investor or the fund manager to supervise. Indexing eliminates the risks, costs, and uncertainties of "active" management (stock picking and market timing).

Moreover, since ETFs are an excellent hedging instrument because they can be borrowed and sold short. It makes sense for stock picker fund mangers confident of outperforming market as the portfolio can be hedged against market risk by going short on Nifty BeES.

The S&P CNX Nifty comprises 50 stocks and is a market capitalisation-weighted index. The stocks are selected on the basis of their market cap and liquidity. The S&P CNX Nifty represents about 25 sectors and about 50 per cent of the total market capitalisation of the stocks listed on the NSE.