Month: May 2011

Continuing with the theme of ETFs this week, today I’m going to write about something that doesn’t impact Indian investors yet, but will surely impact them in the years to come.

Currently, the name of the ETFs pretty much lets you know what it means and there’s not much difference between different ETFs of the same category – for example you can look at the performance of any gold ETF over a certain period of time and find that all of them were fairly close in their performance.

This is because their underlying is the same and all of them buy the same gold, and it’s price movement is the same for everyone.

However, this won’t remain the same forever, eventually there will be fund providers who will create a gold ETF that doesn’t actually own physical gold but only replicates its performance by buying Futures contracts, and there may also be gold ETFs that own shares in the companies engaged in gold mining, trading or dealing with jewelery.

For example – I took 4 oil ETFs that trade in the US market, and saw how they performed in the last year.

You will be amazed to see the variance in performance of these funds. While the best performing went up by about 50%, the worst performing went by just 22% or so.

OIH is a fund that invests in oil producing companies whereas USO is the ETF that tries to replicate the performance of oil with Future contracts.

The lesson here is that even though you’d think of both these ETFs as oil ETFs, the performance between them varies a lot, and before buying into any ETF you need to see what they are going to buy, and then keep an eye on how the fund is performing relative to its peers.

The big question here is how to know which fund will perform well without the benefit of hindsight, and apart from looking at a fund and finding consistent patterns I can’t think of anything else. This is probably another case where you can spread your investment between funds of different kinds and diversify a little.

Arif commented on yesterday’s post that I had misinterpreted the question, and it was in fact a question about variety of ETFs, and not Options on ETF.

I don’t know if I misinterpreted or not, since Amruta who originally posted the comment hasn’t responded yet, but I think that the question of which new ETFs should be introduced is an interesting one, and I’ve often thought about this.

Here is a list of 7 ETFs that I’d like to see launched in the Indian market. Apart from the silver ETF, I haven’t ever read about anything else being considered so think of these as just my wish-list, and not something that’s likely to be launched in the near future.

1. Silver ETF: There’s been a lot of interest in silver for the last year or so, and I think this is one ETF that a lot of people want. Like the gold ETFs, this will hold physical silver and will be like SLV that trades in the US.

2. Oil ETF: There are no oil ETFs in India, and I think this will also be a good product that will give people exposure to oil. It will be good if the oil ETF actually owned oil barrels, but I don’t know of any oil ETF in the US that does it, so I don’t know how feasible it will be to launch such an ETF in India.

3. Copper ETF: People say copper has a PhD in Economics since it tracks the economy so well, and I think this will be a good ETF as well. I’d like this to be similar to the gold ETF, and own physical copper instead of just owning stocks that engage in copper mining.

4. Canada ETF: I’ve always felt it strange that most of the international ETFs and mutual funds in India track other emerging countries and not developed countries. The stocks of developed countries are less volatile and have the scope of offering diversification to Indian investors who have to deal with a lot of volatility in their domestic market.

5. Germany ETF: Reasons are similar to the Canada ETF, and this is a developed and probably the strongest European country of the day. It may be a good idea to get exposure to this.

6. Australia ETF: In addition to being a developed country – Australia is big on natural resources, and a natural beneficiary of China’s rise, and this might be a good asset to own in the future.

7. INR – USD ETF: There are no currency ETFs right now, and this can be another area that can be useful for people, especially those who are invested in stocks abroad, and want some currency exposure as well.

So, this is my wish-list and some of the ETFs that I’d like to see in India; what about you? Which ETFs would you like to see launched in India?

This is another post from the Suggest a Topic page, and it’s about Options trading on ETFs, or rather the lack of ETF Options in India.

Here is Amruta’s comment.

ETF Options are widely traded in US markets. Would like to know ur take on their introduction in Indian markets? which etfs should they b introduced on?? Thanx..

I feel that it’s only a matter of time when Options are introduced on ETFs in India. In fact a few months ago there were plans to create Options on the popular Benchmark Gold BeeS ETF on NSE, but then the FMC (Forward Markets Commission) wrote to the NSE (National Stock Exchange) saying that they should have jurisdiction over Options trading on the commodity based ETF since they already regulate commodities future, and this is quite similar to that product.The launch was then stopped, and since then I haven’t read anything on the matter, but I think this will happen in due course, and after that Options on other ETFs will be launched as well.

I think that it’s good to have Options on these ETFs, as it allows people who are so inclined to take positions and test out their theory.

I have no doubt that a lot of people will lose money in trading Options, but that is no different than trading in stocks, and I’m sure there will be people who make money on them as well.

It also allows you to take short positions which you can’t do without Options. For example, currently, there are no easy ways for small investors in India to take a short position in gold if they’re so inclined but if there were Futures and Options on Gold BeeS they could have sold a Future or bought Puts.

Compare this with the US where a small investor can easily buy long dated Puts on either the popular gold ETF GLD, or even gold mining companies like ABX, and I feel that the Indian investor is at a disadvantage.

Options are not for everyone, but there is a segment of investors who understand these products, can use them, and even eagerly awaiting them, and I feel that it’s only a matter of time before which their wish is granted.

I first came across the concept of investing in fishing related themes on Roger Nusbaum’s blog a few days ago when he wrote about Global X launching a fishing ETF.

Global X has launched the first global fishing ETF in the US a couple of weeks ago.  The FISN Global X Fishing Industry ETF trades on the NYSE Arca and it has around $3 billion in assets already!

Though Indian investors don’t have access to this ETF, I thought I’d write about it since it’s an interesting theme, and it’s good to be aware of such themes before (if at all) they become red hot. As you may imagine this type of fund draws extreme reactions from people. They either think it’s downright silly, or they think it makes perfect sense, so far I haven’t seen a lot of people in the middle.

It’s easy to see why someone may think this is a silly theme, so let me dwell on why people think this makes sense. The idea is that as a large number of people around the globe move to higher incomes and demand protein rich food – fishing related companies will be one of the beneficiaries of the trend.

To take advantage of that – FISN tracks the Solactive Global Fishing Index and the aim of the index is to track the performance of large global companies engaged in the fishing industry.

The index has 20 constituents out of which 18 companies are based outside the US. The index contains a mix of emerging and developed countries, and Norway and Japan are the two largest country components of the index.

Here is the weight of various countries in FISN.

As you can see, Norway and Japan form more than half of the index constituents, and the USD – YEN or USD – Norwegian Krone currency rate movement will seriously impact how the fund performs.

Currency rate movements can have significant impact on ETFs that invest in foreign stocks as we saw in the case of INDY (iShares S&P India Nifty 50 Index Fund) which outperformed its underlying index by quite a bit because favorable exchange rate movement.

Next, let’s take at the top 5 companies that companies that form part of this index.

The fund has an expense ratio of 0.69% so not very highly priced either.  In summary, the fund has a lot of international stocks that are large companies in the fishing sector.

I have absolutely no clue how this will do in the future, but I think this is a very interesting theme, and one that is at least sure to capture the imaginations of people if not provide them good returns.

It’s also the kind of thing that people enjoy telling others that they invested in, so that may be another reason why the fund has grown in size so rapidly.

What are your thoughts? Do you think it silly or does it make sense to you?