Exchange Traded Funds (ETFs) Innovations – MOSt Shares M50 ETF

Global Journey
ETFs have travelled a long distance since its inception in 1993 in USA. It took 7 years (from 1993 – 2000) to get it widely accepted among investors. Once it drew attention from investors, it grew leap and bound; the global ETF assets has reached an all time high of US $ 1.03 trillion as on March 2010 from an estimated US $ 463 million in 1993, clocking a CAGR of 56 per cent. On US Exchanges, 11 out of top 25 volume leaders/stocks are ETFs. Some of the top volume leader ETFs is SPDRs, iShares MSCI Brazil Index, Ultra Short Russel2000 ProShares, etc. These ETFs account for 78 per cent of total volume out of top 25 traded stocks on US Stock Exchanges. It was less than 25 per cent 10 years back.


Indian Journey
Not very old in India, ETFs started its journey in 2001 after Benchmark AMC forayed into this unique proposition. Since then, the ETFs grew by leap and bound. The domestic ETF assets grew from Rs. 7 crore in 2001 to Rs. 3,203 crore as on May 31, 2010. However, the main course of action in ETFs got intensified in the recent bull period. Indian equities component of Global Emerging Markets ETFs account for US $ 5.5 billion of AUM while the domestic equity ETFs now account for US $ 0.5 billion. Overall, over the past year, around 20 per cent of the net inflows into the Indian market have come from ETFs, thereby, ETFs a very significant component of Indian fund flows.


Is ETFs good for investors?
The global historical data suggests that the fund managers have not been able to beat the benchmarks constantly over a longer period. In efficient market scenario, the active funds find difficulty in beating their benchmarks. So, it is always preferable for investors to look for a product which provide a decent return, at least comparable to its benchmark with bounty of other benefits such as tax efficiency, low expense ratios.
ETFs are pools of stocks, bonds or in a few instances other types of investments such as Gold that you can trade like stocks. ETFs tend to have very low annual expenses – much lower than the actively managed funds. Moreover, ETFs are high tax efficient i.e. they tend to minimize distributions, which will drive down your post-tax returns. ETFs are listed on stock exchanges and can be bought and sold like any other company share.


Product Innovations
Innovation is the key to success. For now, at least, all ETFs are an index fund which mirrors an index or a benchmark, unlike actively managed funds whose managers try to beat the market. There have been talk of companies bringing out actively managed ETFs, but so at least in India, it has not been manufactured. Currently, in India, the underlying for ETFs are Index, Sector, Money Market Instruments, Arbitrage etc. One more type to add in the basket of innovated products is actively managed ETF – MOSt Shares M50 ETF, the first of its kind in India, launched by Motilal Oswal Mutual Fund.
Passively-managed ETFs follows its index and invest in the same proportion as of its index while actively-managed ETFs follow their own fundamentally defined rules.