Exchange traded fund is a freely marketable security which tracks a particular index, commodity, bonds or combination of assets. they aren't popular as there is no additional tax incentives, not enough liquidity, under performs most of the time, lack of choices, lack of institutional interest, costs are low but not enough and lack of awareness.
ETF or Exchange traded funds have evolved as a popular and low-cost way to invest worldwide for investors. Particularly for investors who do not want to track individual stocks but are interested in taking exposure to stock market.
Exchange traded fund is a freely marketable security which tracks a particular index, commodity, bonds or combination of assets. ETFs are traded on the exchange. Hence, their price changes dynamically unlike Mutual funds which have a NAV at the end of the day.
Unlike United states and other developed countries, Exchange traded funds haven't really taken off in India.
There are multiple reasons for the same:
1. Relative Under performance: ETFs have tended to under perform actively managed Mutual funds in India. Which is not the case in markets like US where ETF performance is not very far off from mutual fund performance.
2. Lack of choices/Diversification: Investors in India do not have too many choices when it comes to investing in ETFs. Currently, there are limited ETFs linked to the index and apart from gold not many commodity ETFs are available in the market. It's like a typical supply-demand problem, not much quality supply and hence not much demand.
3. Lack of Institutional interest: Few institutions have ETFs on the approved list of investment options. Hence, there are few institutions investing in Exchange traded funds.
4. Costs are low but not enough: ETFs globally have a low-cost structure while in India the cost is little higher. If you add brokerage costs the costs go up further.
5. Lack of Awareness: Because of low margins, not enough has been done to make ETFs popular amongst investors in India. With distributors not getting any margins, they are not promoting them much.
6. No additional tax incentives: In US ETFs are more tax efficient than mutual funds. This is not as such in India. This is primarily because mutual funds and ETFs are treated similarly as far as tax incentives are concerned in India.
7. Not enough liquidity: Lack of popularity of ETFs amongst investors results in reduced liquidity as they are traded in the market. This results in less efficient price discovery and higher spreads for investors. This is not the ideal thing to have in a traded asset class.
What do you think about ETFs in India? Will they gain more popularity? Feel free to share your viewpoint on the same.