Building Portfolio With Exchange-Traded Funds

A recent discussion with Chintan Haria, head of product development and strategy, ICICI Prudential AMC, and Bharat Pareek, head of product and segment, private wealth management, ICICI Securities, threw light on how one could go about building a portfolio with ETFs. They were in conversation with Kundan Kishore, Deputy Editor, Outlook Money.

Here are the edited excerpts from the discussion.

What are the broad categories of ETFs available in India?

Haria: There are broadly three categories of ETFs – equity, debt and commodity, within which there are multiple options that an investor can choose from for making a portfolio.

Which are the most popular ETFs among Indian investors?

Haria: Indians love gold. The value of gold ETF is close to Rs. 20,000 crore, which is quite large. Investors are also looking at debt ETFs as one of the alternatives. It has garnered a lot of interest among the ultra-HNI category.

What about smart beta funds and target-maturity ETFs. Can these add value to an investor’s portfolio?

Haria: Smart beta ETFs have been gaining ground in the last five years. These work on the selection of a particular set of companies on the basis of fundamental or technical factors.

Let’s say, an investor wants to participate in stocks of companies which have shown momentum in the markets in the last 6-12 months. If they invest in a momentum ETF, they will get 30 stocks which have shown momentum in the last six months, and in every six months, they would probably be rebalanced based on six months’ performance. This is gaining ground because people have realised that momentum investing is also a practical route of investing.

Pareek: Smart beta is at a very nascent stage compared to rest of the world. It is about Rs 2,000 crore, which is very small, compared to the industry as a whole. But it is slowly gaining traction. These products are very simple; they bring in a lot of value and are a smarter way to invest. It’s basically factor-based investing.

What’s the investing scenario around these products?

Pareek: Innovative product are not just restricted to smart beta; there’s EV, sustainability, mobility, and artificial intelligence, too. Many people have a broader view that they want to invest in trending concepts like AI and EV, but the problem arises when they can’t decide whether they want to invest in Tesla, a lithium battery manufacturer, or an auto ancillary business which manufactures for EVs. Globally, all these innovative ETFs create a basket which works on a theme, and both retail and HNIs participate in it open-heartedly. This is still evolving. There’s a lack of companies available to play in specific innovative structures, and the depth is limited compared to global options.

What about debt ETFs?

Haria: There are enough debt ETFs available in the market, and many fund houses are launching products where you can park your money for 25-30 years in a Government of India (GoI) bond. It’s a growing category and after the government’s initiative on debt, the knowledge of debt has picked up among investors, and the entire category has opened up.

How can an investor build an ETF portfolio?

Pareek: These depend on three factors – the purpose of your investment, your willingness and ability to take risk, and lastly, your time horizon. Once you define these three, you can work towards making a portfolio of ETFs.

Haria: If you get your asset allocation right, then you don’t need to worry where you are putting your money within that asset class. Just review it once a year, except for events like Covid, where you might want to review it in the middle of the year.

If an investor wants to make a portfolio solely based on ETFs, that’s also doable. There are plenty of mid-cap, small-cap, large-cap, momentum, value, low-volatility, debt, and gold and silver ETFs. If they wait patiently, there’s probably money to be made in gold and silver in the next 3-5 years.

Disclaimer

• ICICI ETF is part of ICICI Prudential Mutual Fund and is used for exchange traded funds managed by ICICI Prudential Asset Management Company Limited.
• Mutual Fund investments are subject to market risks, read all scheme related documents carefully.