Performance of Exchange-Traded Funds in India

Abstract

The concept of Exchange-Traded Funds (ETFs) is very popular in foreign countries, but in India, it is still in theinitial growth phase. This research paper examines the characteristics and growth pattern of all the 82 exchangetraded schemes floated and traded on Indian Stock markets, and evaluates their performance using DataEnvelopment Analysis (DEA). On an average, ETFs grew at 37% annually during the period 2006 -2011in India.These funds consistently outperformed the market index and generated higher returns. ETFs generated excessreturns of 3% p.a. as against CNX NIFTY, which is the Indian equity market bench mark. Gold ETFs provided13% excess returns as compared to the returns on the equity market and attracted large investments in the postfinancial crisis years. Data Envelopment Analysis ranked domestic and overseas fund of funds as efficient funds,which were floated by foreign Asset Management Companies (AMCs) and the AMCs with Joint Ventures inIndia. Among the foreign AMCs, Franklin Templeton was found to offer the most efficient fund. These efficientfunds are found to have higher Sharpe ratios, indicating that the DEA ranking is in broad consensus with theevaluation done using Sharpe ratios. However large funds were not found to be efficient funds. This infers that thefund size does not indicate superior performance.