CHAPTER-5

Comparative Performance Evaluation (A) ETFs (vs) Index Funds in India

(B) ETFs (vs) CNX 500 INDEX

(A) ETFs ( vs) INDEX FUNDS - A COMPARATIVE STUDY

The most significant similarity of ETFs and index funds is the passive

character of their investing strategy. Both of them track specific and known indexes

either broad market, sector or international, offering a considerably great degree of

diversification of portfolio nonsystematic risk. Passive strategy reflects low

managerial costs both for ETFs and mutual funds, since the managers simply

follow the index and they are not obliged to develop costly and complicated

investing policies.

However, ETFs are charged with transaction costs and broker house

commissions, while index funds do not. On the other side, mutual funds are loaded

with redemption and purchase fees.. Basic differences among them also exist.

The main difference is that ETFs are purchased and sold at the exchange

traded prices, which closely fit their net asset value any time during the trading day,

offering to investors the ability to be provided with the stocks that compose an index

with a single transaction. In contrary, index funds can be purchased or redeemed

only at the end of the day at the value of their net assets.

5.1 RETURNS OF ETFs and INDEX FUNDS

In this segment , we present and compare the results of ETFs, and Index

Funds total and average daily returns of ETFs and Index Funds tracking the same

benchmark . NAVs are used to calculate the returns since trading prices are not

available for Index Funds.

TABLE 5.1 RETURNS OF ETFs and INDEX FUNDs

SL.

NO. ETF/INDEX FUND BENCHMARK

TOTAL RETURN

(%)

AVERAGE

RETURN(%)

1 ICICI PRUDENTIAL

INDEX FUND

CNX NIFTY

INDEX 71.3 0.07

2 SBI NIFTY INDEX

FUND

CNX NIFTY

INDEX 70.48 0.07

3 NIFTY BEES ETF

CNX NIFTY

INDEX 69.88 0.07

4 QNIFTY ETF

CNX NIFTY

INDEX 72.86 0.07

In the Table 5.1 we compare the performance of 2 Index Funds and 2 ETFs

tracking ―CNX NIFTY INDEX‖, both are passive investment products, based on

the analysis we observe that they are performing equally since there is very small

difference between their total returns but the average daily return is same for all of

them.

5.2 TOTAL RISK OF ETFs and INDEX FUNDs

Standard deviation is a measure of total risk of an investment , in

this segment we compare the total risk of the ETFs and Index Funds

tracking ―CNX NIFTY INDEX‖. It is a measure of volatility in returns

both upside and downside movement of returns, higher the standard

deviation higher the total risk on the investment.

TABLE 5.2 TOTAL RISK OF ETFs and INDEX FUNDs

S.NO. ETF/INDEX FUND BENCHMARK

STANDARD

DEVIATION(%)

1

ICICI PRUDENTIAL

INDEX FUND

CNX NIFTY

INDEX 1.31

2 SBI NIFTY INDEX FUND

CNX NIFTY

INDEX 1.36

3 NIFTY BEES ETF

CNX NIFTY

INDEX 1.36

4 QNIFTY ETF

CNX NIFTY

INDEX 1.35

We observe from above table 5.2 that ―ICICI PRUDENTIAL INDEX

FUND‖ had recorded the lowest volatility but we do not find much difference

between the standard deviation of ETFs and Index Funds, which means both the

passive investment products are showing similar performance or risk.

5.3 SYSTEMATIC RISK OF ETFs and INDEX FUNDs

Beta is a measure of systematic risk of a stock or portfolio, it

compares the movement of returns of the ETF/Index Fund with the

returns of its benchmark, in general positive beta near to 1 implies high

risk because when markets crash the investors would make heavy losses

due to the movement of the investment returns with the market, but

ETFs need to move along with its benchmark so beta near to 1 implies

best benchmark tracking so beta has to be interpreted in a different way

for ETFs.

TABLE 5.3 SYSTEMATIC RISK OF ETFs and INDEX FUNDs

S.NO

. ETF/INDEX FUND BENCHMARK BETA

1 ICICI PRUDENTIAL INDEX FUND CNX NIFTY INDEX 1

2 SBI NIFTY INDEX FUND CNX NIFTY INDEX 0.99

3 NIFTY BEES ETF CNX NIFTY INDEX 1

4 QNIFTY ETF CNX NIFTY INDEX 1

From Table 5.3 we observe that both ETFs and Index Funds are exactly

tracking their benchmark ―CNX NIFTY INDEX‖ which is interpreted through

their betas equal to 1.

5.4 PORTFOLIO PERFORMANCE MEASURES ETFs and INDEX

FUNDs

Sharpe Ratio shows the risk adjusted performance of the fund. Here the denominator

is the standard deviation of the portfolilo. Thus it takes into account the total risk of the

portfolio, both systematic and unsystematic risk. A fund with a higher Sharpe ratio

implies that the fund has a better risk adjusted return than that of another fund

with a lower Sharpe ratio.

Treynor ratio shows the risk adjusted performance of the fund. Here the

denominator is the beta of the portfolio. Thus, it takes into account the systematic

risk of the portfolio. The beta measures only the portfolio's sensitivity to the market

movement, while the standard deviation is a measure of the total volatility both

upside as well as downside. A fund with a higher Treynor ratio implies that the fund

has a better risk adjusted return than that of another fund with a lower Treynor

ratio.

TABLE 5.4 PORTFOLIO PERFORMANCE MEASURES ETFs and INDEX

FUNDs

S.NO. ETF/INDEX FUND

SHARPE‘S

RATIO

TREYNOR‘S

RATIO

1 ICICI PRUDENTIAL INDEX FUND 0.05 0.07

2 SBI NIFTY INDEX FUND 0.05 0.07

3 NIFTY BEES ETF 0.05 0.07

4 QNIFTY 0.05 0.07

We observe from Table 5.4 that Sharpe‘s and Treynor‘s Ratio is exactly

similar for both ETFs and Index Funds included in the study, which implies that the

return earned for every unit of risk borne is same for both passive investment

avenues.

5.5 JENSENS RATIO/ALPHA OF ETFs and INDEX FUNDS – EXCESS RETURNS OVER ITS BENCHMARK

The Jensen‘s Alpha or Ratio is based on the risk adjusted CAPM model.

This model calculates the returns of funds after adjusting for the risk factor, beta.

When the alpha is zero, the return is the same as market, when the alpha is higher

than zero, there exists excess return on the portfolio when compared to the market,

less than zero implies underperformance compared to its market.

In this section market means the tracking benchmark ―CNX NIFTY

INDEX‖ of the 2 ETFs and 2 INDEX FUNDS, since the 4 passive instruments,

alpha of zero implies excellent benchmark tracking.

TABLE 5.5 JENSENS ALPHA OF ETFs and INDEX FUNDs

S.NO. ETF/INDEX FUND BENCHMARK ALPHA

1 ICICI PRUDENTIAL INDEX FUND

CNX NIFTY

INDEX 0

2 SBI NIFTY INDEX FUND

CNX NIFTY

INDEX 0

3 NIFTY BEES ETF

CNX NIFTY

INDEX 0

4 QNIFTY ETF

CNX NIFTY

INDEX 0

From Table 5.5 we observe that the Jensen‘s Alpha is zero for both ETFs and

Index funds which implies that they are exactly tracking their benchmark without

over or under performance.

(B) ETFs (vs) CNX 500 INDEX - A COMPARATIVE STUDY

The passive management for the majority of ETFs entails that they just invest in

all the components of the underlying index at the same weights without needing to

execute any complex and costly investing strategies and without expecting, however,

to produce any excess return with respect to the performance of the tracking

benchmark.

There are some studies that suggest that an actively managed portfolio of ETFs

can generate a positive alpha, in other words, to outperform its individual funds,

Since ETF is both a stock and a fund we can get the exposure to an entire index

through a single investment in an ETF which also trades like a stock.

In the first step, we calculate the daily return ofETFs and indexes by subtracting

the price

of the ETF or index i on day t 2 1 from its price on day t and dividing the difference

by the price on day t 2 1. The corresponding return of the S&P 500 Index is also

estimated. In the calculation of returns, we assume that the dividends received by

ETFs (if any) are reinvested on the exdividend day. Returns are expressed in

percentage terms.

After computing the raw return of ETFs and indices, we estimate two

alternative types of risk-adjusted performance. The first one concerns the Sharpe

ratio. The Sharpe ratio assesses how well the ETF or the S&P 500 Index compensate

their investors for the per unit risk they run. The higher the Sharpe ratio is, the

better is the performance of the ETF or the index.

Second one makes an attempt to analyze the managerial skill to achieve

superior returns by picking ETFs that could outperform the broad market index we

use the risk-adjusted return in Jensen‘s model / alpha, The coefficient (Jensen‘s

alpha) is used to determine the excess return of the ETF over ―S&P 500 INDEX‖..

Positive and significant alphas indicate that the ETF earns excess returns over the

broad market index.

5.6 AVERAGE RETURNS OF ETFs and CNX 500 INDEX

The issue we explore in this segment relates to the opportunities offered by

ETFs to investors to receive returns above the market returns.

TABLE 5.6 AVERAGE RETURNS OF ETFs and CNX 500

INDEX

S.NO. ETF

Average Return

of ETF(%)

Average Return of CNX

500 Index(%)

1 NIFTYBEES 0.072 0.073

2 QNIFTY 0.085 0.073

3 JUNIOR BEES 0.108 0.073

4 BANKBEES 0.114 0.073

5 RELBANK 0.136 0.073

6 KOTAKPSUBK 0.099 0.073

7 PSUBANKBEES 0.089 0.073

8 SHARIAHBEES 0.075 0.073

AGGREGATE AVERAGE

RETURN(1-8) 0.10% 0.07%

9 GOLDBEES 0.071 0.073

10 GOLDSHARE 0.067 0.073

11 KOTAKGOLD 0.067 0.073

12 RELGOLD 0.067 0.073

13 QGOLDHALF 0.07 0.073

AGGREGATE AVERAGE

RETURN(1-13) 0.09% 0.07%

Table 5.6 presents the average return performance differences between ETFs

and ―CNX 500 Index‖ . In addition, return differences are presented individually

and on an aggregate basis also, the results show that, on average, ETFs outperform

the CNX 500 Index individually and also as an aggregate BASIS during the study

period., the aggregate average return of 13 ETFs equals to 0.09% while the

corresponding performance of the market index is 0.07%.

CHART 5.1

We observe from Chart 5.1 that all the Equity ETFs outperform (or, at least

perform equally to the market index like ―NIFTYBEES‖) when the average returns

performance records are considered.

CHART 5.2

00.020.040.060.08

0.10.120.140.16

NIF

TYB

EES

QN

IFTY

JUN

IOR

BEE

S

BA

NK

BEE

S

REL

BA

NK

KO

TAK

PSU

BK

PSU

BA

NK

BEE

S

SHA

RIA

HB

EES

1 2 3 4 5 6 7 8

AVERAGE RETURNS - EQUITY ETFs (VS) CNX 500

Average Return of ETF(%)

Average Return of CNX 500 Index(%)

Wr observe from Chart 5.2 that all the five Gold ETFs had recorded lower

average returns compared to the average return of ―CNX 500 index‖.

0.0640.0650.0660.0670.0680.069

0.070.0710.0720.0730.074

GO

LDB

EES

GO

LDSH

AR

E

KO

TAK

GO

LD

REL

GO

LD

QG

OLD

HA

LF

9 10 11 12 13

AVERAGE RETURNS - GOLD ETFs (VS) CNX 500

Average Return of ETF(%)

Average Return of CNX 500 Index(%)

5.7 SHARPES RATIO OF ETFs and CNX 500 INDEX

We compare the Sharpe Ratio performance measure of the ETFs

and the ―S&P 500 INDEX‖, and try to interpret the performance of the

ETF in terms of the performance of the broad market index.

TABLE 5.7 SHARPES RATIO OF ETFs and CNX 500 INDEX

S.NO. ETF

Sharpe's Ratio of

ETF(%)

Sharpe's Ratio of CNX 500

Index(%)

1 NIFTYBEES 0.054 0.057

2 QNIFTY 0.065 0.057

3 JUNIOR BEES 0.068 0.057

4 BANKBEES 0.067 0.057

5 RELBANK 0.06 0.057

6 KOTAKPSUBK 0.043 0.057

7 PSUBANKBEES 0.044 0.057

8 SHARIAHBEES 0.035 0.057

AVERAGE(1-8) 0.06% 0.06%

9 GOLDBEES 0.075 0.057

10 GOLDSHARE 0.075 0.057

11 KOTAKGOLD 0.072 0.057

12 RELGOLD 0.073 0.057

13 QGOLDHALF 0.076 0.057

AVERAGE(1-13) 0.06% 0.06%

CHART 5.3

CHART 5.4

The risk-adjusted performance measure (Sharpe‘s Ratio) shows from Chart

5.3 that out of the 8 Equity ETFs, 4 ETFs (QNIFTY, JUNIORBEES, BANKBEES

AND RELBANK) Sharpe‘s Ratios are above the Sharpe‘s Ratio of ―CNX 500

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08N

IFTY

BEE

S

QN

IFTY

JUN

IOR

BEE

S

BA

NK

BEE

S

REL

BA

NK

KO

TAK

PSU

BK

PSU

BA

NK

BEE

S

SHA

RIA

HB

EES

1 2 3 4 5 6 7 8

SHARPES RATIO - EQUITY ETFs (VS) CNX 500

Sharpe's Ratio of ETF(%)

Sharpe's Ratio of CNX 500 Index(%)

00.010.020.030.040.050.060.070.08

GO

LDB

EES

GO

LDSH

AR

E

KO

TAK

GO

LD

REL

GO

LD

QG

OLD

HA

LF

9 10 11 12 13

SHARPES RATIO GOLD ETFs (VS) CNX 500

Sharpe's Ratio of ETF(%)

Sharpe's Ratio of CNX 500 Index(%)

Index‖ and from Chart 5.4 we see that all the five Gold ETFs Sharpe‘s ratios are

above the Sharpe‘s ratio of ―CNX 500 Index‖..

The average Sharpe‘s Ratio of the Equity ETFs (0.055%) is slightly below

the ― CNX 500 INDEX‖ Sharpe‘s Ratio of (0.057%), whereas the average of all the

13 ETFs is (0.062%) is above the average of ―CNX 500 INDEX‖ Sharp‘s Ratio of

(0.057%).

5.8 JENSENS RATIO / ALPHA OF ETFs – EXCESS RETURNS

OVER S&P CNX 500 INDEX

In this segment, we use the CNX 500 Index as a proxy for market return

because this is the most widely adopted market benchmark academic research on

the ability of active management to beat the market and offer investors above -

average performance. Even though ETFs are basically passive investing products,

there are reports arguing that investors can apply more active investing strategies

by building a portfolio consisted of a wide range of assets belonging both to large -

and small-cap ETF stocks, Sector ETF stocks, Commodity ETF stocks, domestic

and international ETF stocks, as to obtain a positive Jensen‘s alpha.

The Jensen‘s Alpha or ratio is based on the risk adjusted CAPM model. This

model calculates the returns of funds after adjusting for the risk factor, beta. When the

alpha is zero, the return is the same as market, when the alpha is higher than zero, there

exists excess return on the portfolio when compared to the market. The portfolio manager

has the ability to predict future prices and earns a higher return than the return implied by

the CAPM. Consequently, when the alpha is below zero, the manager underperforms

relative to the market.

TABLE 5.8 EXCESS RETURNS ON ETFs over CNX 500 INDEX

(JENSENS RATIO)

S.NO. ETF JENSEN'S RATIO

1 NIFTYBEES 0

2 QNIFTY 0.02

3 JUNIOR BEES 0.05

4 BANKBEES 0.06

5 RELBANK 0.11

6 KOTAKPSUBK 0.06

7 PSUBANKBEES 0.04

8 SHARIAHBEES 0.04

9 GOLDBEES 0.07

10 GOLDSHARE 0.06

11 KOTAKGOLD 0.06

12 RELGOLD 0.07

13 QGOLDHALF 0.07

From the above Table 5.8 we observe that the Jensen‘s alpha is positive for seven

Equity ETFs and five Gold ETFs implying that the ETFs are able to earn excess returns

over the market index (S&P 500 Index), and only one Equity ETF ―NIFTYBEES‖ had

recorded an Alpha equal to zero which says that the ETF is performing same as the

market.

The above results suggest that by holding a portfolio of ETFs the investor can get

the diversification to beat the broad market index.

CHART 5.5

Chart 5.5 depicts that among the Equity ETFs ―RELBANK‖ recorded highest

alpha and ―NIFTYBEES‖ zero alpha, but overall all of them are earning excess returns

over the broad market index ―CNX 500 Index‖.

0

0.02

0.04

0.06

0.08

0.1

0.12

NIF

TYB

EES

QN

IFTY

JUN

IOR

BEE

S

BA

NK

BEE

S

REL

BA

NK

KO

TAK

PSU

BK

PSU

BA

NK

BEE

S

SHA

RIA

HB

EES

1 2 3 4 5 6 7 8

JENSEN'S ALPHA- EXCESS RETURN ON EQUITY ETFs OVERCNX 500 INDEX

JENSEN'S RATIO

CHART 5.6

Chart 5.6 demonstrates that among the five Gold ETFs ―GOLBEES‖,

―RELGOLD‖ and ―QGOLDHALF‖ recorded similar Alpha, but all of them had recorded

excess returns over the broad market ―CNX 500 Index‖.

We can say that by holding a portfolio of ETFs tracking varied benchmarks the

investors can earn a return above the broad market return.

0.054

0.056

0.058

0.06

0.062

0.064

0.066

0.068

0.07

0.072

GOLDBEES GOLDSHARE KOTAKGOLD RELGOLD QGOLDHALF

9 10 11 12 13

JENSEN'S ALPHA - EXCESS RETURN ON GOLD ETFs OVER CNX 500 INDEX

JENSEN'S RATIO

CHAPTER-6

FINDINGS, CONCLUSIONS AND

SUGGESTIONS

6.1 FINDINGS:

1. Among the Equity ETFs the ETFs tracking specific sector indices had

recorded higher returns compared to ETFs tracking diversified indices.

2. We observe that compared to Equity ETFs, Gold ETFs tracking the same

benchmark are performing in a similar manner, implying that there is high

competition in Gold ETF market.

3. We find that Equity ETFs are recording higher total and average returns

compared to Gold ETFs, since the upside is undefined for Equity Markets.

4. We observe that Equity ETFs had recorded higher volatility when compared

to Gold ETFs, this is observed because of systematic and unsystematic factors

affecting stock markets on a day to day basis.

5. ETFs tracking specific sector indices had recorded high volatility compared

to ETFs tracking diversified indices, due to the reason that unsystematic risk

is not diversified for sector specific indices because all the firms are equally

affected by firm specific factors.

6. Observing the Betas we find that both Equity ETFs and Gold ETFs are

tracking their benchmarks according to their passive character, since beta

measures the correlation of the returns of ETF and its Benchmark, higher the

Beta better the index tracking.

7. We find that Betas for ETFs tracking diversified indices are higher than betas

for ETFs tracking specific sector indices.

8. We find that all the five Gold ETFs are competing equally for market share,

shown through their similar returns, volatility and betas.

9. When we observe the downside risk measure Value at Risk, we find that

among that Equity ETFs tracking diversified indices had recorded lower daily

VaR compared to ETFs tracking specific sector indices.

10. We find that more than 50% of the ETFs are recording VaR same as their

benchmarks, and few of them lower than their benchmarks which is a very

good indication

11. We observe that compared to Equity ETFs, Gold ETFs had recorded lower

daily VaR, because in capital markets downside movement of stock returns

are higher.

12. We observe that only for well diversified portfolios both Sharpe‘s and

Treynor‘s performance measures give the same ranking, since unsystematic

risk is almost reduced to zero due to diversification and left over risk is

systematic risk only, which is covered through beta, but for funds tracking

specific sector indices or single assets total risk should be considered because

unsystematic risk is not diversified, since ETFs track non diversified Specific

Sector Indices and Single Commodity Assets like Gold, Sharpe‘s measure is

more suitable and reliable because it takes into consideration total risk

(Standard Deviation) , and Treynor‘s measure considers only systematic risk

(Beta).

13. When we compare the performance of the ETFs and their Benchmarks using

average differences in returns we find that more that 50% of the Equity ETFs

are either outperforming or exactly performing with their benchmarks,

whereas in case of Gold ETFs one is performing same as its benchmark, one

outperformed its benchmark and 3 underperformed compared to their

benchmarks ―SPOT GOLD PRICE‖.

14. When we observe the performance of the ETFs along with their benchmarks

using Sharpe‘s Ratio we observe that 50% of Equity ETFs had outperformed

their benchmarks, and all the Gold ETFs included in the study had

outperformed their benchmark during the study period.

15. When we observe the Extended Sharpe‘s ratio we find that out of the eight

Equity ETFs five had outperformed and three underperformed compared to

their benchmark and out of the five Gold ETFs three underperformed one

exactly performed and one underperformed compared to their benchmark but

the deviation of underperformance is very small.

16. For evaluating the performance of ETFs Extended Sharpe‘s Ratio, is a good

performance measure since it presents the excess return earned by the ETF

over the return on its Benchmark for every unit of total risk borne, Sharpe‘s

Ratio does not tell whether the ETF is outperforming or underperforming

compared to the benchmark, but Extended Sharpe‘s Ratio serves this purpose.

17. When two ETFs tracking the same benchmark are given the same rank by

Sharpe‘s Ratio, to study them further Extended Sharpe‘s Ratio is useful for

example ―KOTAKPSUBK‖ and ―PSUBANKBEES‖, were given equal

ranking by the former ratio but the latter ratio differentiated and showed that

―PSUBANKBEES‖ is a better ETF.

18. Jensen‘s alpha is positive for all the eight Equity ETFs which implies that all

are outperforming their benchmarks, Out of the five Gold ETFs three

recorded positive alphas and two zero alphas, which implies that 80% of the

ETFs studied had outperformed their benchmark and 20% exactly performed

with their benchmarks, but the Equity ETFs alphas are slightly high compared

to Gold ETFs alphas, implying that there is a slight deviation in tracking their

benchmarks.

19. Regression analysis on trading price relation between ETF and Benchmark

shows that all the 8 Equity ETFs are accurately tracking their benchmark

prices, but Gold ETFs are falling by10% in tracking the ―Spot Gold Prices‖,

t-stats are high which implies that the null hypothesis is being rejected, or in

other proving that Trading Prices of ETFs are dependent on the Trading Prices

of their Benchmarks.

20. Beta implies the level of systematic risk, If beta is bigger than unity, the ETF

moves more aggressively in comparison to the benchmark and if beta lies

bellow unity, the ETF follows a conservative investing policy, if beta is equal

to unity ETF moves with the benchmark, Regression on Returns of ETFs and

Benchmarks records betas below unity for both Equity and Gold ETFs,

―NIFTYBEES‖ and ―JUNIORBEES‖ had recorded highest betas proving their

good index tracking capability.

21. The deviation of returns of the ETF from its Benchmark is called Tracking

Error, lower the tracking error better the performance of the ETF, when we

observe the tracking errors we find that ETFs tracking diversified indices had

recorded lower tracking errors compared to ETFs tracking specific sector

ETFs we also observe that Gold ETFs had recorded low tracking errors

compared to Equity ETFs.

22. Regression analysis on relation between NAVs and Trading Prices of ETFs,

shows that out of the eight Equity ETFs two are trading at a premium two are

exactly trading at its NAV whereas two are trading at a discount, among the

Gold ETFs four are trading at a discount, only one is exactly trading at its

NAV, t-stats are very high for both Equity and Gold ETFs which leads to the

rejection of the null hypothesis.

23. Regression on one day time lag relation between the trading prices of ETFs,

reveals that the betas of all the eight8 Equity ETFs are almost near to ‗1‘ and

Gold ETFs betas are exactly ‗1‘ which implies that there is a strong relation

between two consecutive trading prices of ETFs, whereby through observing

previous days price we can estimate next day‘s price movement. The t-stats

are high which implies that the null hypothesis is rejected.

24. We also observe that there is not much difference between actual and

predicted trading prices based on one day time lag on trading prices

regression, since their average price and standard deviations are almost same,

so this model can be applied to predict the future movement of market price of

ETFs with some small adjustment to the predicted price.

25. When we compare the performance of ETFs with that of Index Funds we

observe that both passive investment avenues are exactly tracking their

benchmarks and their performance is similar both in terms of return and risk.

26. . When we study the average performance differences between ―ETFs‖ and

―CNX 500 Market Index‖, the results show that, on average, the ETFs

outperform the ―CNX 500 Index‖ individually and also on an aggregate basis

during the study period., the aggregate average return of ETFs equals to

0.09% while the corresponding performance of the market index is 0.07%.

27. We observe that the Jensen‘s alpha is positive for all eight Equity ETFs, and

five Gold ETFs, implying that the ETFs are able to earn excess returns over

the market index ―CNX 500 Index‖. Giving an indication that by holding a

portfolio of ETFs the investor can beat the market.

28. Indian stock market indices see frequent churn of indices going in and out

such churn forces the fund manager to sell the script that moves out of the

index buy the script that comes into the index, here the ETF fund manager

himself rebalances the portfolio whereby the scheme bears the cost.

29. Due to the availability of large number of stocks in the market the active fund

managers are able to pick stocks that outperform the broad market indices due

to which ETFs are unable to attract the retail investors.

30. Expense Ratios of Equity ETFs are lower than Gold ETFs, high expense

ratios lead to reduction of return on ETF to the investor.

31. The turnover of Gold ETFs during the study period is very high compared to

Equity ETFs but Gold ETFs had been introduced recently when compared to

Equity ETFs..

32. ETFS tracking Sector Specific Indices are more risky than ETFs tracking

Diversified Indices.

33. All the ETFs launched by Gold Man Sachs Asset Management Company

previously Benchmark Funds AMC under the ETF brand ―BEES‖ are

performing good, except for ―SHARIAHBEES‖.

6.2 Conclusions:-

In this research work we empirically investigated the trading characteristics

and performance of Exchange Traded Funds, an investing product that had been

introduced in Indian Capital Market over a decade. Later we compare the

performance of the ETFs and Index Funds tracking same benchmark index, we also

compare the performance of ETFs with broad market index ―S&P 500 Index‖ to

find the ability of ETFs to beat the market.

We perform the study on 8 Equity ETFs and 5 Gold ETFs listed on National

Stock Exchange of India. The sample ETFs track some of the most significant

indices of Indian capital market and Spot Gold Prices.

Based on the study we conclude that among the Equity ETFs specific sector

ETFs are providing higher returns and higher volatility compared to diversified

ETFs, Equity ETFs returns are positively correlating with their benchmarks

returns as observed through their high betas, which is required by passive

investment instruments.

We observe that Equity ETFs are exactly tracking their benchmark prices,

they are trading at prices near to their net asset values and their returns are

correlating with their benchmark returns, the tracking error of specific sector ETFs

are higher than diversified ETFs, .Index Funds and Equity ETFs tracking ―CNX

NIFTY INDEX‖ are performing in a similar manner both are tracking their

benchmark and are also providing the same returns and risk.

On Average the sample ETFs are outperforming the market index S&P

CNX 500 INDEX, they are also providing positive Jensen‘s Alphas showing that

they are performing better than the market.

6.3 Suggestions:-

1) ETFs provide investors with a convenient way to buy or sell exposure

to an index or a basket of stocks with a vehicle that trades like a stock,

both large institutions investors and small individual investor‘s can

avail this investment option .

2) If an investor is not sure about which particular stock to buy but likes

the overall sector, investing in shares tied to an index or basket of

stocks provides diversified exposure to a volatile sector and reduces

risk in the event of specific stock news. ,the volatility or risk

associated with an index or basket is lower than the volatility or risk

of an individual stock.

3) Since ETFs trade like stocks, buyers must pay a brokerage

commission every time they buy or sell shares, these commission add

up quickly, especially if you‘re buying more shares each month. ETFs

are good for lump-sum investors, but you should use a traditional

index fund if you‘re buying a few at a time.

4) Consider your costs before investing in ETFs. An expense ratio tells

you how much an ETF costs. The amount is skimmed from your

account and goes towards paying a fund‘s total annual expenses.

Remember, the expense ratio doesn‘t include the brokerage

commissions you pay to buy and sell ETF shares.

5) Invest in ETFs tracking diversified indices instead of specific sector

indices in order to get benefit of exposure to varied sectors and reduce

the market volatility.

6) Invest in Gold ETFs since it provides an opportunity to investors

to accumulate gold over a given period of time. Since it can be

purchased in small quantities of 1 unit which is equal to 1 gram

gold, one can plan the procurement as per future requirements.

7) Diversification helps protect your portfolio against fluctuations in the

value of any asset class. Gold is an ideal diversifier, because the

economic forces that determine the price of gold are different from,

and in many cases opposed to, the forces that influence most financial

assets traditional diversifiers often fall during times of market stress or

instability. On these occasions most asset classes (including

traditional diversifiers such as bonds and alternative assets) all move

together in the same direction. There is no ―cushioning‖ effect of a

diversified portfolio, leaving investors disappointed. So include Gold

ETF in your portfolio to balance your investment portfolio.

8) By holding a portfolio of ETFs the investors can get the

exposure of a broad market index and also they can earn a

return above the market.

9) Investors should look at the fund house before making the

investment, Gold Man Sachs AMC is one of the good fund

houses since 90% of ETFs launched by it are performing good.

10) Investors should study the risk profile of the ETF since

they are prone to market, interest rate, credit risk and also

Tracking Errors, Tracking Error is one of the important indicator

of ETF performance.

11) Finally the liquidity of the ETF should be observed

through they volumes and turnover before making the

investment.

Scope for further Research There is lot of scope for further research on ETFs since there is

very less literature available on ETFs listed on Indian Capital Markets,

Researchers in the future can study

The performance of ETFs tracking major indices of NSE and BSE.

Study the performance of ETFs tracking Specific Sector Indices

and compare them with the performance of ETFs tracking

Diversified Indices.

Study the performance of ETFs during various states of economy,

with special reference to recessions.

Study the performance persistence of ETFs compared to the

performance of Market.