The amalgamation of the Forward Markets Commission with capital markets regulator Securities and Exchange Board of India in September 2015 raised hopes of dabbling in various exchange-traded funds such as silver, platinum, diamond, copper, aluminium and even steel. However, things have not moved fast enough even after 30 months of the merger of regulators.
While globally ETFs are thriving with various products based on equities, commodities and metals, in India they are only on equities and gold.
Earlier, a number of fund houses were keen to launch ETFs based on silver but could not go forward due to the regulatory tussle between SEBI and FMC, the erstwhile commodities regulator, on who would regulate these products.
Equity ETFs are an open-ended mutual fund that trac their underlying index and invest in same stock that as constituted the index. Commodity ETFs offer exposure to various commodities, including metals, oil, grains, livestock, coffee and sugar. Some commodity ETFs concentrate on a single commodity, while others offer broader exposure.
Dozen ETFs
Currently, over one dozen ETFs are traded on the exchanges, that are based on gold. In India, Benchmark Mutual Fund, which was initially acquired by Goldman Sachs and is currently owned by Reliance MF was the first to launch an ETF based on gold. Gold BeES has given a return of almost 200 per cent (point to point) since its listing in March 2007.
However, according to MorningStar, an ETF based on silver gave a negative return of 0.33 per cent for a 10-year period. But the iShares Silver Trust gave a return of 17 per cent in 2016; and in 2009 and 2010, it had produced fabulous returns of 47.3 per cent and 82 per cent, respectively. This volatility makes it suitable as an underlying for ETFs.
SEBI’s comment
Recently, SEBI in a discussion paper said the Indian commodity derivatives market has been running without any institutional participation, thereby lacking the desired liquidity and depth,which are the key elements for efficient price discovery and price risk management. Once MFs are allowed in commodity markets, it is expected that there may also be ETFs in several other commodities, especially silver.