ETFs can give you higher returns than benchmarks: WisdomTree

Structured exchange traded funds(ETFs) could beat benchmarks and actively-managed funds over a longer period, said David Abner , director of institutional ETF sales and trading at WisdomTree Asset Management . Weighted ETFs, where base index weightages and its constituents are altered to increase returns, could deliver more 'passive' alpha to investor portfolios, said Abner. An ETF is an investment fund traded on stock exchanges, much like stocks. They have stocks, commodities and bonds as underlying assets.

"Fundamentally, weighted ETFs yield more returns than the index. These products are structured to provide passive alpha in a more efficient and price-effective manner," said Abner, who is in India to attend an ETF conference convened by Motilal Oswal Asset Management.

With the proliferation of active funds, it has become difficult for investors to choose proper active investment strategies. "Weighted ETF is the new way to invest. These products are more efficient than several other active vehicles out there. Statistics over time have shown that activelymanaged funds have not outperformed broader indices," he said. Retail investments worth Rs 7,700 crore -- roughly over 1.5% of overall mutual fund assets - are managed through exchange traded funds in India; of this Rs 5,463 crore are invested in gold ETFs alone, as per data by Assocation of Mutual Funds in India. Gold ETFs, which have given about18.6% returns over the past one year, have underperformed gold local prices. Gold prices have gained 20% to Rs 22,320 per 10 grams during the same period.


"The ETF industry will grow in India in the years to come. There is a market here for sure; but then, investors have to be taught about these products," he said. Low liquidity has been the biggest problem faced by ETF listed in Indian exchanges. In terms of trading volumes, popular ETFs like Nifty Junior BeES and Liquid BeES logged just over a lakh units last year. Weighted ETF M50 by Motilal Oswal Asset Management listed a turnover of 14.56 lakh units in 2010. Another worrying aspect is higher expense charges levied on passive ETF fund management strategies. Fund houses charge 0.5-0.75% as asset management charges to manage ETF pools.

However, Abner believes that the expense ratio on ETFs will come down as the instrument becomes more popular in the days to come."In market cap-weighted funds, the asset manager has to mirror a fixed index. ETFs with additional screens and structured models allow fund managers to buy good liquid stocks in a more efficient manner," he said. While the category is gaining popularity among domestic investors, India-focused ETFs managed by overseas fund houses are witnessing investment outflows as a result of subdued market conditions back home.





Prominent ETFs such as Ipath MSCI India, Wisdom Tree India and Powershares India among others have been witnessing redemptions money over the past few months. "Actually, there has not been a lot of redemption from India-focused ETF. The values could have gone down because of the market downturn. Long-term view of India as an investment destination is very good. There are not many drastic changes in the composition of India ETFs," he said, but declined to comment on the performances.

Source: Economic Times

Thanks and Regards,
Sanchari Sinha,
Intern at DENIP Consultants Pvt. Ltd.