For beginners, ETFs are mutual fund schemes that offer exposure to asset classes such as equities, gold and fixed income. In recent years, increased digital penetration has resulted in more investors opting to open online trading accounts and demat accounts to participate in financial markets. This has led to an increase in the acceptance of ETFs.
Mutual fund houses have also sensed the shifting mindset of investors, especially among gen Z and younger millennials. Fund houses have been building their ETF portfolios carefully. Designated teams of professionals within asset management companies have ensured that the ETFs gain more mindshare of the investors. Fund houses have been introducing new ETFs that track emerging themes and sectors that may not receive adequate representation in actively managed mutual fund schemes. In July 2024, six ETFs were launched – three of these invested in equities, two in fixed income and one in commodity.
The launch of sectoral or thematic ETFs is expected to attract more investors compared to ETFs tracking traditional market-cap based indices. For example, the Mirae Asset Nifty EV and New Age Automotive ETF offers a basket of stocks that may benefit from the emerging electric vehicle and new age vehicles trends. ETFs are not limited to new age sectors. Some of the old-economy sectors are also being represented by newly launched ETF products. ICICI Prudential AMC recently launched ICICI Pru Nifty Oil & Gas ETF and ICICI Pru Nifty Metal ETF.
The mutual fund houses are not content with the launch of ETFs tracking traditional market-cap based indices and sectoral or thematic indices. In addition to launching ETFs tracking single factor indices, they are now launching ETFs tracking multi-factor indices. For example, we recently saw launch of the Mirae Asset Nifty MidSmallcap400 Momentum Quality 100 ETF. The regulatory landscape has been conducive to the growth of ETFs. The regulator – the Securities & Exchange Board of India has already prescribed norms to ensure that ETFs are cost-efficient and that units of ETFs have enough liquidity in the secondary market. Measures such as appointment of market makers and the publishing of i-NAV (indicative net asset value) of the ETF during market hours for equity ETFs have bolstered investors’ confidence. A recent consultation paper by SEBI has proposed introduction of new high-risk products, including inverse ETF. Inverse ETF allows the investor to profit from a decline in the value of the underlying index. This is an effective way of shorting the underlying index. As ETFs continue to evolve, they are expected to cater to the needs of a wider segment of investors and capture a bigger slice of household savings. Investors should consider these trends and use equity ETFs to build a core equity portfolio. One key advantage the ETFs offer is the small ticket size, which allows individual investors to gradually accumulate units of ETFs on dips to fund their long-term goals.
Traders can also use some of these sectoral ETFs to initiate positional long trades. Additionally, ETF units can be offered as margin, providing traders with leverage, if required.
Investors should consider using ETFs to build a diversified portfolio. ETFs can help reduce risk at portfolio level while lowering costs. Investments in ETFs offer a structured approach to create wealth in long term.
(The author is the founder & CEO of SAS Online – a deep discount stock broker. Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)