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What are exchange-traded products (ETPs)?

These are financial instruments that are, quite simply, traded on public exchanges. Most retail investors have access to these vehicles for free and liquid investments.

ETPs in India encompass Exchange Traded Funds (ETFs), Exchange Traded Commodities (ETCs), and other exchange-traded products. 

With their versatility, transparency, and potential for diversification, ETPs have become an attractive choice for Indian investors in the last few years.

In this article, we’re going to cover everything you need to know about ETPs, their investment returns, their types, and how you can invest in them in India.

What are ETPs?

Exchange Traded Products (ETPs) are a broad category of investment vehicles that are traded on stock exchanges, similar to traditional stocks.

They have become very popular now because they’re versatile – meaning they can incorporate exposure to various different asset classes under a single or multiple categories, transparent – since they’re traded on public exchanges and regulated by institutions like SEBI, and cost-effective – meaning that their management costs are very low.

ETPs can provide you with exposure to different sectors, assets, and strategies at the same time with little effort. Exchange Traded Funds (ETFs), for instance, can track various indices, ranging from broad-based market indices to specific sectors or investment themes. Exchange Traded Notes (ETNs), on the other hand, are structured products that provide exposure to alternative asset classes, such as commodities, currencies, or sophisticated investment strategies. Exchange Traded Commodities (ETCs) offer investors a convenient way to gain exposure to commodities without the need for physical delivery or storage.

Types of ETPs and examples

  • Equity ETFs: Equity ETFs are designed to track the performance of various stock market indices or specific sectors/themes.
    • Nifty BeES – Tracks the Nifty 50
    • Reliance ETF Bank BeES – Tracks the Nifty Bank index
    • ICICI Prudential Nifty Next 50 ETF – Tracks the Nifty Next 50 index
  • Debt ETFs: Debt ETFs invest in fixed-income securities such as government bonds, corporate bonds, and other debt instruments.
    • Bharat Bond ETF – Invests in a basket of government bonds with different maturity periods
    • Edelweiss Government Securities Scheme ETF – Tracks the Nifty Government Securities Index
  • Gold ETFs: Gold ETFs are designed to track the price of physical gold.
    • HDFC Gold Exchange Traded Fund
    • ICICI Prudential Gold ETF
    • Nippon India ETF Gold BeES
  • Commodity ETFs: Commodity ETFs track the performance of various commodities or commodity indices, such as energy, metals, or agricultural products.
    • Nippon India ETF Liquid BeES – Tracks the Nifty 1D Rate Index
    • Kotak Nifty India Consumption ETF – Tracks the Nifty India Consumption Index
    • Nippon India ETF Hang Seng BeES – Tracks the Hang Seng Index
  • Strategy / Thematic ETFs: Designed to track specific investment strategies or themes, such as value investing, dividend-paying stocks, or specific sectors like technology or healthcare.
    • ICICI Prudential Nifty Low Vol 30 ETF – Tracks the Nifty 100 Low Volatility 30 Index
    • Nippon India ETF Hang Seng TECH ETF – Tracks the Hang Seng TECH Index
    • Mirae Asset Nifty India Manufacturing ETF – Tracks the Nifty India Manufacturing Index

Returns on ETPs

Generally, equity-based ETPs that track broad market indices or specific sectors have delivered impressive returns, aligning with the robust performance of Indian markets in recent years. For instance, some top-performing equity ETFs have generated annualised returns in the range of 12-18% over the past five years.

On the other hand, fixed-income ETPs, such as those tracking government bond indices, have typically offered more modest returns in line with the prevailing interest rate environment and the lower risk they assume with their capital. Commodity ETPs have exhibited varying returns based on the performance of the underlying commodities, with gold and energy-related ETPs being notable performers during certain periods. 

How to invest in ETPs in India

Investing in ETPs is a straightforward process that can be accomplished through various channels. 

One of the most convenient methods is to open a demat (dematerialized) account and a trading account with a stockbroker. Many leading brokers in India offer online platforms and mobile apps that allow investors to easily buy and sell ETPs listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Once you have a functioning account and capital ready to be deployed, you can identify the specific ETPs you want to invest in. You could choose equity, fixed income, commodities, or some combination of these three to create a portfolio that aligns with your specific return needs and risk appetite.

Frequently Asked Questions

Can I invest in international ETPs through Indian brokers?

Yes, many Indian brokers offer access to international ETPs listed on foreign exchanges, allowing investors to gain exposure to global markets and asset classes. However, you should be informed on whether these platforms charge extra fees or commissions in return for international trading access.

Are there any lock-in periods or exit loads for ETPs in India?

No, there are typically no lock-in periods or exit loads for ETPs in India. Investors can buy and sell ETPs on the stock exchanges during regular trading hours, just like regular stocks or mutual funds.

How are dividends or income from ETPs taxed in India?

The taxation of dividends or income from ETPs in India depends on the underlying assets. For equity-based ETPs, dividends are taxed at the applicable rates for equity investments. For fixed-income or commodity ETPs, the income may be treated as capital gains or business income. We encourage you to consult a tax professional for filing your taxes correctly.

Are there any liquidity concerns with ETPs in India? 

Generally, no. Since these products are, by definition, traded on public markets every single day, you should not run into liquidity issues as a retail investor. In some specific cases, institutions might have some trouble getting in and out of large positions, but that’s not something you have to worry about.

How do I evaluate the tracking error of an ETP?

Tracking error measures how closely an ETP’s performance tracks its underlying index or benchmark, like the NIFTY 50 for instance. You can evaluate the tracking error by comparing the ETP’s returns with its stated index or benchmark over various time periods. Lower tracking error indicates better replication of the underlying index’s performance.

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