The Performance and Trading Characteristics of Exchange Traded Funds in India: An Empirical Study

Abstract

This study empirically examines the performance and trading characteristics of Exchange Traded Funds (ETFs) in India. A sample of twelve ETFs listed on the National Stock Exchange of India has been analyzed in this study over a period ranging from January 2002 to December 2009. The study finds evidence of significant daily tracking errors for ETFs, however no significant bias in performance is found over long term investment horizon. Moreover, ETFs were found to follow nearly full portfolio replication strategy as promised by them. However, significant pricing deviations (premiums and discounts) were found to exist in the trading of these instruments. Also, such deviations were found to persist over a number of days indicating gross pricing inefficiencies and the presence of unexploited arbitrage opportunities in the Indian ETF market which commands immediate attention of the market players. To the best of our knowledge there has been no previous published research study which empirically examines the performance and trading characteristics of Exchange Traded Funds in India.