Though ETFs make good investing sense, don't get into them blindfolded. Several counters are becoming manipulator dens

 

The ongoing stock market turmoil has taken a toll on exchange traded funds (ETF). Now only a few equity ETFs like Goldman Sachs Nifty BEES get traded on a regular basis.Several ETF counters are also becoming manipulator dens. For example, some of them are now trading significantly higher or lower than their respective NAVs (see table). Though a good concept, you should be aware of the pitfalls before investing in ETFs.

Before explaining the precautions you need to take, let us examine how the situation came to such a sorry state. There are several reasons.First, the concept of index investing itself has not taken root in India as yet. Since actively managed Indian funds are able to beat their benchmarks on a 3-5 year time period, there is no case for index investing now. Second, AMCs that launch these ETFs are not appointing strong market makers who can provide enough liquidity to the counter and thereby , prevent market manipulation by punters. Third, the way the exchanges compute the price band for the next day is also not correct. Instead of basing it on the scheme's NAV , one day's price band is based on the previous day's closing value. So if the price moves away from the NAV due to any stray trade, that becomes the benchmark for the next day.

Since mutual funds provide direct redemption facility only in extreme situations (like no trading for continuous 5 days), the best strategy for investors is to go only to the ETF counters that have a clear track record. ETF is a business of scale and a significant portion of money flows to top two ETFs in the US.

Track record needs to be on several parameters and regular trading with enough volume is one of the most important criteria. However, don't go with the trading pattern in the last few days as this may be manipulated, but for at least a year. Asset under management (AUM) can be other criteria as ETFs with large AUM tends to have a larger investor base and higher trading interest.

Bidask spread is the most important aspect for an ETF so watch the counter closely for a few weeks and make sure that there is a market maker who gives regular bidask spread before entering.

Instead of NFOs, investors should go for schemes with track record and this rule is more apt for ETFs. This is because investors won't have any idea about whether the counter will have enough liquidity after listing.

As explained earlier, ETF is a business of scale and if the new ETF is not able to achieve scale, investors will be in trouble. Wait for the listing and get in later.

Edelweiss Nifty EES

While several ETFs listed in the stock market are languishing without much investor interest, one more ETF, Edelweiss Nifty EES, is hitting the street with its new fund offering (NFO).EES stands for Edelweiss Exchange traded Scheme. Unlike other existing Nifty based ETFs, where the NAVs will only be a fraction of the Nifty value, the new ETF promises to make its NAV close to the Nifty. Why? NAV value close to Nifty make it easy for traders and investors.