For starters, ETFs are mutual fund schemes that offer exposure to asset classes like equities, gold and fixed income. In recent years, increasing digital penetration has resulted in more investors choosing to open online trading accounts and demat accounts to participate in the financial markets. This has led to increased acceptance of ETFs.
Mutual fund houses have also experienced the changing mindset of investors, especially among Gen Z and younger millennials. Fund houses are building their ETF portfolios carefully. Dedicated teams of professionals in asset management companies have ensured that ETFs gain greater investor mindshare. Fund houses are launching new ETFs that track emerging themes and sectors that may not get 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 commodities.
The launch of sectoral or thematic ETFs is expected to attract more investors than ETFs that track traditional market-cap based indices. For example, Mire Asset Nifty EV and New Age Automotive ETF offer a basket of stocks that can benefit from emerging electric vehicle and new age vehicle trends. ETFs are not limited to new age sectors. Some sectors of the old-economy are also represented by newly launched ETF products. ICICI Prudential AMC recently launched ICICI Pru Nifty Oil & Gas ETF and ICICI Pru Nifty Metal ETF.
Mutual fund houses are not satisfied with traditional market-cap based indices and the launch of ETFs that track sectoral or thematic indices. Apart from launching ETFs that track single factor indices, they are now launching ETFs that track multi-factor indices. For example, we recently saw the launch of the Mirae Asset Nifty MidSmallcap400 Momentum Quality 100 ETF.
The regulatory landscape is conducive to the growth of ETFs. The regulator – Securities and Exchange Board of India has already laid down norms to ensure that ETFs are cost-efficient and units of ETFs have sufficient liquidity in the secondary market. Measures such as appointment of market makers during market hours for equity ETFs and publication of i-NAV (indicative net asset value) of ETFs have boosted investor confidence.
A recent consultation paper by Sebi has proposed the introduction of new high-risk products including inverse ETFs. An inverse ETF allows an investor to profit from a decline in the value of an underlying index. This is an effective way to shorten the underlying index.
As ETFs continue to evolve, they are expected to meet the needs of a wider segment of investors and capture a larger portion of household savings. Investors should consider these trends and use equity ETFs to build a core equity portfolio. A key advantage that ETFs offer is the small ticket size, which allows individual investors to gradually accumulate units of the ETF on dips to fund their long-term goals.
Traders can also use some of these sector ETFs to initiate positional long trades. Additionally, if required, ETF units can be offered as margin, providing leverage to traders.
Investors should consider using ETFs to build a diversified portfolio. ETFs can help reduce risk at the portfolio level by reducing costs. Investing in ETFs provides a structured approach to building wealth over the long term.
(The author is the founder and CEO of SAS Online – a deep discount stock broker. The recommendations, suggestions, opinions and views given by the experts are their own. (These do not represent the views of The Economic Times)
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