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Nifty ETF: The Way Forward

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Nifty ETF

By: Tavaga Research

Benchmark Mutual Fund, in 2001, (later acquired by Goldman Sachs in 2011) launched India’s first Exchange Traded Fund which tracked the Nifty 50 index. Since then, until 2015, the growth of ETFs in India has been very slow, however, ETFs have gained a lot of traction in the last 5 years as the assets under management have surged from Rs 7,032 crore in August 2015 to Rs 2.07 lakh crore in August 2020.

The assets under management of ETFs in India witnessed an annualized growth rate of more than 90 percent in the last 5 years as the number of ETFs also increased from 36 to 82.

In times of recent economic crisis and stock market volatility, investors have been investing in Nifty ETFs which has become clearer from the fact that the asset base of all ETFs tracking the Nifty 50 index crossed Rs 1 lakh crore a couple of weeks back (Source: National Stock Exchange).

What is Nifty?

Nifty is a blended word, derived from the combination of two words – National and Fifty, as 50 stocks actively trade on the Nifty 50 index. The Nifty index came into existence on 21st April 1996 and was introduced by the National Stock Exchange (NSE).

The term ‘Nifty’ is an acronym for National Stock Exchange Fifty. National Stock Exchange, which started its operations to end the monopoly of the Bombay Stock Exchange (BSE), is the leading stock exchange in India. NSE Indices Ltd. [formerly known as India Index Services & Products Limited (IISL)] owns and manages the Nifty index.

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Nifty 50

Nifty 50, one of the benchmark-based indices is considered to be the barometer of Indian capital markets. Nifty 50 index is made up of the most liquid blue-chip companies. The index is made up of the top 50 companies and is computed using the free-float market capitalization method.

Features of Nifty 50 Index:

  • As of March 2019, the Nifty 50 index represents about 67% of the free-float market capitalization of the NSE listed stocks
  • Out of all the stocks trading on the NSE, the TTV (total traded value) of the Nifty 50 constituents (stocks) is approximately 53.4%
  • Impact cost, which is the increase in the cost of trade (increase in the price of a share) triggered by high demand from a bulk order, of the Nifty 50 index for a portfolio size of Rs 100 lakhs is 0.04%

Top 10 Constituents of Nifty 50 Index (By Weightage)

Weightage Of Top 10 Stocks Of Nifty 50
Source: NSE, Tavaga Research

As the largest seven companies together constitute more than 50 percent of the Nifty 50 by weightage, the movement in their stock prices will considerably affect the index’s value as well.

Contribution of Top 5 Companies in Nifty 50

Sectors of Nifty 50 Index (By Weightage)

Sector Weightage of Nifty 50
Source: NSE, Tavaga Research

As the largest three sectors together constitute more than 50 percent of the Nifty 50 by weightage, the movement in the stocks of these sectors has affected the performance of Nifty 50 in the longer term.

The Nifty 50 index has gone through several changes in the last 25 years as Indian equity markets were the direct beneficiaries of structural reforms carried out by various governments and regulatory bodies.

Financial Services, which ensures robust financial network and contributes to the growth of a nation’s economy by providing credit facilities, accounted for only 20% of the Nifty 50 index at the inception, however, the contribution of the financial space today, is more than 33%. Information Technology (IT) sector which had no presence in the Nifty 50 index in 1996, today makes up for 17% of the index with Infosys and Tata Consultancy Services (TCS) being the top contributors.

Change in sector exposure over the years (%)

Sector Inception (1995-96) March 2009 March 2014 September 2020
Financial Services 19.7 11.78 27.45 33.32
IT 0 9.05 16.34 16.81
Energy 12.6 40.74 14.31 16.73
Consumer Goods 18.8 6.42 12.63 11.88
Automobile 12.4 3.31 8.82 5.79
Pharmaceuticals 2.5 2.49 5.23 4.03
Construction 4.3 3.88 4.97 2.27
Metals 11.6 5.44 4.8 2.16
Cement 2.2 1.9 3.08 2.13
Telecom 0 9.78 1.68 2.08
Power 0 0 0 1.71
Fertilizers 1.8 0 0 0.57
Services 2.7 0 0 0.52
Textile 5.5 0 0 0
Chemical 5.4 0 0 0
Industrial Manufacturing 0.5 5.2 0.69 0
Total 100 100 100 100

Source: NSE, Tavaga Research

Nifty ETF: What is Nifty ETF?

Exchange-Traded Funds are passive instruments that are similar to index mutual funds, except the fact that ETFs can be purchased and sold on a stock exchange. The functioning of an ETF is similar in many ways to a stock as the former can be purchased on margin and even sold short.

The asset management companies (AMCs) provide ETF products that passively mirror the composition of NSE indices with the objective of delivering returns that closely correspond to the securities in the index. This is referred to as Nifty ETF.

Securities are pulled together by ETFs that are then divided into smaller units and finally sold to investors. The stocks (or any other asset class) in the portfolio of a particular ETF are identical to those in an index, in the same weightage.

Nifty Exchange Traded Funds India

Many AMCs have started offering ETFs in India as the product is gaining a lot of traction at a time when equity and debt-oriented active mutual funds are witnessing continuous outflows every month.

Following is the list of ETFs that mirror the constituents of NSE indices:

Name of the Nifty ETF Issuing AMC Symbol Underlying Index
SBI ETF Nifty SBI AMC SETFNIFTY Nifty 50
Motilal Oswal M50 ETF Motilal Oswal AMC M50 Nifty 50
Kotak Nifty ETF Kotak AMC KOTAKNIFTY Nifty 50
ICICI Prudential Nifty 50 ETF ICICI Prudential AMC ICICINIFTY Nifty 50
Nippon India ETF Nifty BeEs Nippon India AMC NIFTYBEES Nifty 50
ICICI Prudential Nifty 100 ETF ICICI Prudential AMC ICICINF100 Nifty 100
Motilal Oswal Midcap 100 ETF Motilal Oswal AMC M100 Nifty Midcap 100
SBI ETF Banking SBI AMC SETFNIFBK Nifty Bank
Nippon India ETF Long Term Gilt Nippon India AMC NETFLTGILT Nifty 8-13 year G-Sec Index
Nippon India ETF Junior BeEs Nippon India AMC JUNIORBEES Nifty Next 50
SBI ETF Nifty Junior SBI AMC SETFNN50 Nifty Next 50
Nippon India ETF Nifty IT Nippon India AMC NETFIT Nifty IT

Source: NSE, Tavaga Research

Nifty ETF Expense Ratio: Do mutual funds eat a portion of your returns?

Investors looking to invest in funds frequently encounter the dilemma posed by the plethora of instruments available in the market.

One such decision is whether to invest in actively managed mutual funds (MFs) or exchange-traded funds (ETFs). Ultimately, the choice depends on the investment horizon, return requirement, and risk appetite of the investor.

To better understand which investment is suitable, it is essential to understand the effect of costs associated with such investments.

Active portfolio management strategies call for higher fees, which manifest in the form of total expense ratio (TER). TERs are charged annually on the assets under management (AUM) in favor of the fund’s operating expenses. The average expense ratio of an active mutual fund ranges from 0.5%-2%.

Funds operating expense is a sum of investment manager fees, custodial services, taxes, accounting and auditing fees, advertising fees. A maximum TER of 2.5 percent is allowed by SEBI

Passive portfolio management does not demand active involvement of the fund manager, eliminating investment manager fees, which forms a significant portion of TERs. The average expense ratio of ETFs is 0.1%.

Savings on TERs in the short term is barely significant. However, savings compound over periods to maximize return for an investor with a long investment horizon.

Studies have analyzed that passive management strategies, historically, have provided higher returns as compared to active management strategies.

Therefore, ETFs are likely to realize higher returns through savings in cost as well as higher performance.

Nifty ETF vs Index Funds: Difference between ETFs and Index Funds

ETF vs Index Funds
Source: Tavaga Research

How can I buy Nifty ETF? – Modes of Investing in Nifty ETFs

  1. Online-only Mode: Nifty ETFs trade on the stock exchange and therefore can be purchased or sold through the online trading terminal or the mobile application offered by the broker
  2. The order for Nifty ETFs can also be placed by calling the broker and confirming the trade specifications

Top Performing Nifty ETFs in India

Scheme NameBenchmarkReturn 5 Year (%) RegularReturn 5 Year (%) BenchmarkDaily AUM (Cr.)
SBI ETF Nifty 50NIFTY 50 Total Return Index9.059.1379,245.16
Invesco India Nifty ETFNIFTY 50 Total Return Index9.009.132.12
ICICI Prudential Nifty ETFNIFTY 50 Total Return Index8.999.131,356.97
Aditya Birla Sun Life Nifty ETFNIFTY 50 Total Return Index8.969.13179.37
Nippon India ETF Nifty BeESNIFTY 50 Total Return Index8.919.132,416.08
Kotak Nifty ETFNIFTY 50 Total Return Index8.639.13926.36
ICICI Prudential Nifty 100 ETFNIFTY 100 Total Return Index8.519.0212.32
Motilal Oswal M50 ETFNIFTY 50 Total Return Index8.249.1319.33
Nippon India ETF Nifty 100NIFTY 100 Total Return Index7.899.027.18
SBI ETF Nifty Next 50NIFTY Next 50 Total Return Index7.637.96537.19
Nippon India ETF Junior BeESNIFTY Next 50 Total Return Index7.337.961,197.71
SBI ETF Nifty BankNIFTY Bank Total Return Index6.316.802,465.08
Nippon India ETF Bank BeESNIFTY Bank Total Return Index6.206.805,676.57
Motilal Oswal Midcap 100 ETFNIFTY Midcap 100 Total Return Index5.296.3442.19
Quantum Nifty ETFNIFTY 50 Total Return Index8.869.137.72

Source: AMFI, Tavaga Research

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