Project

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PERFORMANCE OF ETFS AND INDEX FUNDS: A
COMPARATIVE ANALYSIS
A Project Report submitted in
Partial Fulfillment of the
Degree of Bachelor of Business Studies
Submitted by:
Kawaljeet Kaur
Roll No. 12035234015
KESHAV MAHAVIDYALAYA
(University of Delhi)

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Certificate
This is to certify that the project report entitled
“Performance of ETFS and Index Funds: a Comparative
Analysis” is the project work carried out by Kawaljeet
Kaur at Keshav Mahavidyalaya for partial fulfillment of
BBS. This report has not been submitted to any other
organization for the award of any other Degree /Diploma.
(Signature of Student) (Signature of Supervisor)
Kawaljeet Kaur Ms Kangan Jain

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EXECUTIVE SUMMARY
Investment is the commitment of funds in an asset of financial instruments with the aim of
generating future returns in the form of interests, dividends or appreciation in the value of the
instrument. Instrument is involved in many areas of economy, such as, business, management,
and finance no matter from households, firms, or governments.
An investor has numerous investment options to choose from, depending on his risk profile and
expressions of returns. Different investment options represent a different risk- reward trade off.
Low risk investments are those that offer assured, but lower returns, while high risk investments
provide the potential to earn greater returns. Hence, an investor’s risk tolerance plays a key role
in choosing the most suitable investment. Various investments option available are Bank
Deposits, Commodities like Gold, Silver etc., Post Office Savings Schemes, Public Provident
Fund, Company Fixed Deposits and Stock Market Option like Bond and Debentures, Mutual
Fund, Equity Shares etc., of the various types of investment option in the stock market,
Exchange Traded Funds and index funds.
Exchange Traded Funds (ETFs) are marketable securities that track an index, a
commodity, bonds, or a basket of assets like an Index Funds. Unlike Mutual Funds, an
ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout
the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees
than mutual fund shares, making them an attractive alternative for individual investors.
The concept of Exchange-Traded Funds (ETFs) is very popular in foreign countries, but in India,
it is still in the initial growth phase. On an average, ETFs grew at 37% annually during the period
2006 -2011in India. These funds consistently outperformed the market index and generated
higher returns.
An Index Fund is a fund that specializes in the purchase of securities that match or represent a
specific index. Investing in an index fund is a form of passive investing. The primary advantage
to such a strategy is the lower management expense ratio on an index fund. Index Funds today

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are a source of investment for investors looking at a long term, less risky form of investment.
The success of index funds depends on their low volatility and therefore the choice of the index.
Although Index mutual funds and Exchange traded funds look similar but they in real term they
differ in various aspect. Index funds have been around for quite some time but the popularity of
Exchange Traded Funds (ETFs) among retail investors is rising. ETFs and index funds are
simply 2 different ways of investing in a similar portfolio of shares.
Exchange-traded funds are one of the best known innovations in financial markets. ETFs hold
assets such as stocks, commodities, or bonds, and trade close to their net asset value (NAV)
throughout the day. ETFs can track a specific index, a particular sector of an industry, or even
the stock markets of a foreign country. ETFs that are passively managed and track their
benchmark indices are known as classical ETFs. ETFs combine the positive aspects of closed-
ended and open-ended mutual funds. ETFs have several advantages over traditional mutual
funds, such as lower expense ratios, trading flexibility, tax efficiency, transparency, and
exposure to diverse asset classes. Mutual funds have higher expense ratios than ETFs because of
entry and exit loads. It is pertinent to note that in India, entry loads for mutual funds have been
banned while exit loads do exist. ETFs can be traded like stocks throughout the day while open-
ended mutual funds can be accessed only at the end of the day. ETFs are more tax efficient
because of their in-kind creation and redemption process, which allows for arbitrage and pricing
efficiency. In the case of ETFs, only the transacting shareholder is taxed, while the gains are
distributed to the other shareholders. On the other hand, the transactions of mutual funds
generate tax consequences for all the unit holders. ETFs are more transparent than mutual funds
as they declare their daily holdings, unlike mutual funds, which declare their holdings at the end
of the quarter. In addition to the numerous advantages of ETFs, investors can have exposure to
various asset classes, from commodities to livestock. The phenomenal growth of ETFs globally
has attracted the attention of researchers and investors, and extensive studies have been done on
ETFs in the context of the developed markets of the U.S. and Europe.
In India, the Nifty Benchmark Exchange Traded Scheme (Nifty BeES), was the first ETF to be
introduced in 2001. Nifty BeES was subsequently taken over by Goldman Sachs Asset

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Management Company. At present, there are over 40 ETFs listed in India and a majority of the
ETFs are still passively managed, meaning that the ETFs track their underlying benchmark
indices.
On the other hand, the first mutual fund in India was set up by the Government of India. When
the Unit Trust of India (UTI) was created in 1963, UTI had a monopoly in the mutual fund
business and the next mutual fund—the SBI Mutual Fund—was established only in 1987. From
the late 90s onwards, there was a proliferation of mutual funds in India. At the end of December
2013, there were 1430 mutual fund schemes managing around INR 8,50,000 crore Several
prominent fund houses such as SBI Mutual Fund, ICICI Mutual Fund, Reliance Mutual Fund,
and so on have schemes that invest predominantly in the benchmark indices. The AUM for ETFs
stood at INR 10,273 crore as on December 2013—the AUM for gold ETFs stood at INR 8784
crore and that for other ETFs was INR 1489 crore. These figures are very low compared to those
of mutual funds and it is obvious that ETFs have a long way to go in India. ETFs are already
challenging the dominance of mutual funds, and this trend will continue with greater intensity.

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TABLE OF CONTENTS
Chapter No. Title of the Chapter Page No.
Acknowledgement………………………………………………………………………. 9
Introduction……………………………………………………………………………. 10-13
Comparison between ETFs and Index Funds…………………………………………..14-15
Review of Literature………………………………………………………………….. .16-18
Objectives of the Study……………………………………………………………..…... 19
Hypothesis…………………………………………………………………………….. 20--21
Data Source…………………………………………………………………………….. 22
Characteristic of ETFs and Index Funds………………………………….………..…..23-25
Research Methodology………………………………………………….. ………….... 26-27
Performance of ETFs and Index Funds……………………………………………….. 28-29
Tracking Error of Funds………………………………………………………………. 30-31
SPSS Analysis………………………………………………………………………….32-46
Conclusions……………………………………………………………….……….……. 47
Limitations……………………………………………………………………...….…… 48
Bibliography………………………………………………………………….…….……49
 Appendices……….………………………………………………………….…50-55

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LIST OF CHARTS
Charts Page No.
1. Performance of Kotak Nifty ETF and Its benchmark index………………………..50
2. Performance of GS Nifty BeEs ETF and Its benchmark index……………………. 50
3. Performance of Kotak Sensex ETF and Its benchmark index………………………51
4. Performance of Birla Sun Life Index Fund and its benchmark index. …………….. 51
5. Performance of Franklin India Index Fund and its benchmark index……………… 52
6. Performance of HDFC Index Fund-Nifty Plan and its benchmark index…………... 52
7. Performance of HDFC Index Fund-Sensex Plan and its benchmark index………… 53
8. Performance of IDBI Index Fund and its benchmark index………………………... 53
9. Performance of Principal Index Fund and its benchmark index…………………….54
10. Performance of Reliance Index Fund and its benchmark index……………………. 54
11. Performance of Tata Index Sensex and its benchmark index………………………. 55
12. Performance of UTI Fund and its benchmark index………………………………... 55

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LIST OF TABLES
Tables Page No. (12, bold)
Fig. 1. Characteristics of Exchange-Traded Funds…………………………………….23
Fig. 2. Characteristics of Index Funds…………………………………………………24
Fig. 3. Active Returns of Exchange-Traded Funds and Index funds…………………...29
Fig. 4. Table 4: Tracking Error of Exchange-Traded Funds and Index funds………....30

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ACKNOWLEDGEMENT
Behind every achievement lays an unfathomable sea of gratitude to those who have extended
their support and without whom this project would have ever come into existence. It gives me a
great pleasure in acknowledging the invaluable assistance extended to me by various
personalities in the successful completion of this project.
I am indebted to my guide Ms. Kangan Jain, for her useful insights and valuable suggestions
that she gave me during the preparation of this project. Her unremitting inspiration and
encouragement helped this report, to take the final shape.
I would also like to thank all my batch mates for their help and support throughout the project.
(Kawaljeet Kaur)

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Introduction
Exchange Traded Fund is a security that tracks an index, a commodity or a sector like an index
fund or a sectoral fund but trades like a stock on an exchange. It is similar to a close-ended
mutual fund listed on stock exchanges. ETF's experience price changes throughout the day as
they are bought and sold. Exchange Traded Funds (ETFs) have been in existence in India for
quite some time now. But so far ETFs have not enjoyed the kind of popularity that the
conventional Mutual Funds enjoy. One reason could be the lack of understanding of the concept
of ETF amongst the general investor. Second, and probably the more important reason, is that
ETFs by nature track a certain index (e.g. SENSEX or the BANKEX). Hence, the returns one
can expect from ETFs will be equal to the rise in the index. Whereas, India is a growing market
and hence offers huge opportunities in the non-index shares too. Therefore, it is not difficult for
an active fund manager to beat the index and offer better returns.
Exchange-traded funds (ETFs) are increasingly finding favor in the global financial markets;
foreign institutional investors (FIIs) in particular are using ETFs to gain exposure to emerging
markets. In India, ETFs are making their presence felt gradually. In fact, ETFs are one of the
disinvestment modes proposed by the Indian government for public sector undertakings (PSUs).
After liberalization in 1991, FIIs have played a significant role in the Indian stock market. It has
been estimated that a sizable chunk of FII flows comes through offshore and India-focused
equity funds and ETFs. 1 Notably, several India-specific ETFs that exist in the U.S. such as
WisdomTree India Earnings Funds, iShares MSCI India ETF, and PowerShares India Portfolio
concentrate exclusively on Indian stocks. The assets of offshore equity funds and India-focused
ETFs were USD 55.84 billion in 2010 and USD 37 billion in 2012.
Exchange-Traded Funds (ETFs) were first introduced in USA in 1993. About 60% of trading
volumes on the American Stock Exchange are reported to be from ETFs. As per the ETF
landscape report released by BlackRock Inc. (a US-based AMC), ETFs have grown by 33.2%,
compounded annually in the past 10 years, and 26.1% in the past five years, globally. ETFs are
referred to as passive schemes that fund managers resort to, to avoid risk and offer low-cost
options to the investors. These funds rely on an arbitrage mechanism to maintain the prices at
which they trade, in line with the net asset values of their underlying portfolios.

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On an average in India, ETFs grew at 37% annually during 2006 -2011. These funds also
generated excess returns of 3% p.a. as against CNX NIFTY, the Indian equity market’s
benchmark. Gold ETFs provided 13% excess returns as compared to the returns on the equity
market and attracted large investments in the post financial crisis years. While the concept of
ETFs is very much popular in foreign countries, in the Indian markets it is still in the initial
growth phase. According to the Association of Mutual Funds of India (AMFI) data, the Indian
mutual fund (MF) industry has been holding Rs. 6.75 trillion worth of assets over the past
decade. On an average, during 2006-2011, Indian ETFs comprised of only 1.4% of the total
industry assets. In comparison, in the US, ETFs comprise about 9% of the MF industry. This
trend often raises the query among the investors as to whether or not Exchange-Traded Funds
(ETFs) will be able to perform well in India.
In 2001, Benchmark was the first company to launch the first ETF in India - Nifty BeES, which
was listed on the NSE for trade. In 2007, Benchmark also launched the first Gold Exchange-
Traded Fund. Figure 1 presents a comparison of the growth in the total assets of the Indian MF
industry and the growth of ETFs in India. The growth rate in ETFs was found to be higher than
the industry growth rate during 2006 - 07. However, ETFs did not continue to grow at that pace
in the post financial crisis period. Figure 2 presents the percentage of ETF assets with respect to
the total assets of the Indian MF industry. While in 2006-07, the share of ETFs in the total
industry was about 3%, it fell subsequently to around 1.4%. After 2011, the share of ETFs in the
total industry is again rising.

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In India, only three classifications of ETFs exist, namely:
 Index ETFs- ETF is actually index funds that hold and keep certain securities and
attempt to duplicate the performance of a stock market index. An index fund main
objective is to track the performance of an index by holding in its portfolio either a
sample of the securities in the index or the contents of the index.
 Commodity ETFs- Commodity ETF invests in commodities such as precious metals and
futures. In India, we only have Gold ETF
 Bond ETFs- In case of Bond ETF’s there is currently only one such ETF available in
India, i.e. Liquid BeES.

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Classical ETFs are those that invest in the benchmark indices, which is a passive investing
technique. Passively managed ETFs, at first glance, appear to be a simple exercise; in reality
however, this is not the case. Similar to mutual funds that have exposure to the benchmark
indices (i.e., the S&P BSE SENSEX index and the CNX Nifty index), passively managed ETFs
also have exposure to these benchmark indices. The most popular classical ETFs include the GS
Nifty BeES, the Kotak Nifty ETF, the MOST Shares M50 ETF, and the Birla Sun Life Nifty
ETF.
The most popular classical ETFs include the GS Nifty BeES, the Kotak Nifty ETF, the MOST
Shares M50 ETF, and the Birla Sun Life Nifty ETF. As on February, 2015, the AUM for the GS
Nifty BeES was INR 724.11 crore, the AUM for the MOST Shares M50 was INR 29.78 crore,
and the AUM for the Kotak Nifty ETF was around INR 97.90 crore. Some of the most popular
index funds are the ICICI Prudential Index Fund– Nifty Plan, the Franklin Index Fund, the UTI
Nifty Index Fund, and the Reliance Index Fund–Nifty Plan. As on February, 2015, the AUM for
the ICICI Prudential Index Fund– Nifty Plan was INR 95.19 crore, the AUM for the UTI Nifty
Index Fund was INR 193.24 crore, and the AUM for the Franklin Index Fund was INR 214.82
crore. It is pertinent to note that both classical ETFs as well as index funds track the benchmark
indices. Given that ETFs and index funds track similar indices, it would be interesting to
investigate which fund is actually performing better—index funds or passively managed ETFs.
Hence, in this study, we examine the performance of ETFs compared to that of index funds in
the Indian context.

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COMPARISON
Index mutual funds have been around for quite some time but the popularity of Exchange Traded
Funds (ETFs) among retail investors is rising. ETFs and index funds are simply 2 different ways
of investing in a similar portfolio of shares. Both have their own advantages and disadvantages.
We will examine some parameters to know which one is best suited for an investor.
Structure
ETFs - An ETF is made up of stocks making a particular index like Sensex or Nifty. Each of the
stock would have the same weightage as it has on the index. Some portion of its assets may be
held in cash or money market securities for liquidity purpose. Returns of an ETF are usually
close to that of the index. However since the percentage of debt or liquid assets varies with ETF
so does return from different ETFs thought they all track the same index.
Index funds - The portfolio of index funds also replicates a stock exchange index. Since index
funds have no liquidity of their own, usually they have higher percentage of assets in cash and
liquid securities than ETFs. Therefore this leaves for what is known in industry terminology as
Tracking Error. Higher the tracking error, greater the deviation from actual index returns (in any
direction).
Transacting
ETFs- ETFs as the name suggest, are bought and sold on the exchange. So you need a demat account
for investing in ETF. Minimum one unit of the ETF has to be bought and it is done in the same way as
shares are bought through a broker.
Index Funds-These are mutual funds and units can be bought lump sum or periodically through
SIP. Automating investment through SIP (Systematic Investment Plan) is a strong advantage of
index funds.

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Charges
ETFs-There are no recurring charges in case of ETFs. Apart from the annual maintenance
charge (1%) on your demat account the only other charge is transaction charge of maximum
0.5%. Overall charges in an ETF would come to be about 0.5%.
Index Funds- This is the worst demerit of index funds compared to ETFs. First there is the fixed
transaction fee of Rs 100 for all investments above Rs 10,000. Second there is a recurring AMC
charge called as expense ratio which presently ranges from 1% -1.8%. This is deducted from
your investment even if there are no transactions. Finally if you redeem investment before exit
period a flat percentage is deducted as exit load. This can be ignored because anyway index
funds are supposed to be held long term.
There is however a way to dodge some of these charges in index funds. Direct investment with
the AMC does not involve transaction fee and expense ratio of such plans are also lower. Since
direct was introduced only in January 2013, this has not been concluded how much the
difference might come to.

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Review of Literature
Many prior studies examined the pricing efficiency of ETFs, wherein the difference between
ETF prices and NAVs was investigated. Ackert and Tian (2000) found that the U.S. ETFs are
priced closer to their NAVs than the country ETFs are. Examining the tracking error and
performance of ETFs, Elton et al. (2002) found that SPDR ETFs underperformed the S&P 500
index by an average of 28 basis points per annum; they also found the tracking errors to be very
small
Poterba and Shoven (2002) examined the performance of SPDRs and highlighted the tax
advantages of ETFs due to their unique in-kind creation and redemption. Rompotis (2005)
compared the performance of ETFs and index funds that track the same indices and showed that
the returns produced by them are almost similar and that they do not provide any excess returns
over their underlying indices. Rompotis (2005) also demonstrated that tracking error is strongly
dependent on the expense ratio and risk of ETFs. Gallagher and Seagara (2006) investigated the
performance of classical ETFs in Australia and reported that the variation between the NAV and
the traded price is small. Svetina (2010) found that although ETFs underperform their benchmark
indices, they actually outperform the index funds. In the Indian context, Prasanna (2012)
examined the performance of Indian ETFs and found that gold ETFs provide returns in excess of
13% compared to the returns offered by the equity market. However, the performance of ETFs
was not compared to that of index funds.
Adjei Frederick (2009) found no significant difference between the performances of the ETFs
and the S&P 500 index. He found weak evidence of performance persistence on both the half-
yearly and the yearly horizons. Johnson (2009) reported the existence of tracking errors between
foreign ETFs and the underlying home index returns.
Blitz David et al. (2010) investigated the performance of index mutual funds and the ETFs that
are listed in Europe. They found that European index funds and ETFs underperform their
benchmarks by 50 to 150 basis points per annum. William (2009) found the existence of tracking
errors between foreign ETFs and the underlying home index in US.

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Blitz David and Huij (2011) evaluated the performance of ETFs that provide passive exposure to
global emerging markets (GEM) equities and found that GEM ETFs exhibit higher tracking
error.
Houweling (2011) found that treasury ETFs were able to track their benchmark but investment
grade corporate bond ETFs and high yield corporate bond ETFs underperform their benchmarks.
Charupat & Miu (2011) analyzed the performance of leverage ETFs, and concluded that price
deviations are small among leverage ETFs and that price volatility is more, as a result of
rebalancing, at the end of the day.
Patrick (2011) found that in Hong Kong the magnitude of tracking errors is negatively related to
the size but positively related to the expense ratio of the ETFs. He further commented that
replicating the performance of underlying securities involves more risk, since they have a higher
tracking error than in the US and Australia.
Chang and Krueger (2012) investigated the performance of Exchange-Traded Funds and Closed-
End Funds over the 2002 to 2011 period. They studied investment results such as returns, risks
and risk-adjusted returns and found that though ETFs have significantly lower expenses, their
performance is statistically worse than those of close-ended funds. On the contrary, there was
equal evidence of positive performance of ETFs. Ching-Chung et.al. (2005) indicated that the
Taiwanese ETF and, the Taiwan Top 50 Tracker Fund (TTT) are price efficient and trading on
them produces almost identical returns to the Taiwan stock market. Joel et al. (2006) compared
the risk and return performances of ETFs available for foreign markets and closed-end country
funds. They found higher mean returns and Sharpe ratios for ETFs, and concluded that a passive
investment strategy through ETFs is observed to be superior to an active investment strategy
using closely held country funds.
Huang and Guedj (2009) investigated as to whether an Exchange-Traded Fund (ETF) is a more
efficient indexing vehicle than an Open-Ended Mutual Fund (OEF). They noted that ETFs are
better suited for narrower and less liquid underlying indexes, and also for investors with long
investment horizons.

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Meric et al. (2009) reported that from October 9, 2007 to March 9, 2009, the U.S. stock market
experienced the worst bear market and lost about 56% of its value during this period. They
compared the performances of 38 sector index funds using the Sharpe and Treynor portfolio
Performance measures and found that the healthcare and consumer staples sector index funds
had the best performance and the financials and home construction sector index funds had the
worst performance in the October 9, 2007-March 9, 2009 bear market run.
Wong and Shum (2010) examined the performances of 15 worldwide ETFs across bearish and
bullish markets over the period 1999 to 2007. They observed that ETFs always provide higher
returns in a bullish market than in a bearish market. They noted from the Sharpe ratios that ETF
returns are not positive and proportional to the market volatility.
Yuexiang et al. (2010) investigated the pricing efficiency of the Shanghai 50 ETF (SSE 50 ETF),
the first Exchange-Traded Fund (ETF) in China. They demonstrated that ETF market prices and
their Net Asset Values are co-integrated and there is a unidirectional causality from price to
NAV. They also found that the fund’s prices did not closely follow the NAV during the second
half of 2007, when the Chinese stock market experienced substantial volatility, reflecting sudden
increased market risks as well as potential arbitrage opportunities during financial turbulences.
Gerasimos (2011) found that the performance of ETFs is predictable and the return superiority is
persistent in the short term level.
There are many research papers on the Indian mutual fund (MF) industry. Sivakumar et al.
(2010) observed that private players were able to mobilize greater resources in the Indian MF
industry than public institutions. Jaspal Singh (2004) evaluated the performance of various
mutual funds and found that ICICI prudential floated and managed by a private AMC is the best
performer in India. Madhumita et al. (2008) evaluated the performance of mutual funds on the
basis of rate of returns as well as risk-adjusted methods, and found that the majority of equity
funds outperformed the benchmark index. Most of these studies evaluated the growth and
performance of equity funds.
This mixed evidence about performance of ETFs across developed as well as emerging
economies warrants and motivated the present research about the performance of ETFs in India.

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Objectives of the Study
While the concept of Exchange-Traded Funds (ETFs) is very popular in the US and some
developed European countries, the growth in ETF markets is still in an early stage in the global
emerging markets that comprise countries such as China, India, South Africa, Russia, South
Korea and Brazil. Since these countries have become increasingly important to investors due to
their fast growing economies, it is necessary to analyze the performance of ETFs. Thus, this
research paper examines the characteristics of ETFs and index funds.
The Objectives are:
 To evaluate the performance of ETFs and Index Funds.
 To test whether there is a correlation between ETFs Returns and Index Funds Returns.
 To test whether some independent variables have an impact on the returns of ETFs and
Index Funds.

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Hypothesis
Hypothesis 1:
H0: There is no significant difference between the performance of ETFs and Index Funds.
Ha: There is a significant difference between the performance of ETFs and Index Funds.
Hypothesis 2:
H0: There is no significant difference between the means of Tracking Error of ETFs and Index
Funds.
Ha: There is a significant difference between the means of Tracking Error of ETFs and Index
Funds.
Hypothesis 3:
H0: There is no significant correlation between the Average Returns of ETFs and Index Funds.
Ha: There is a significant correlation between the Average Returns of ETFs and Index Funds.
Hypothesis 4:
H0: Independent variables (Inflation Rate and Market Return CNX Nifty) have no impact on the
Average Returns of ETFs.
Ha: Independent variables (Inflation Rate and Market Return CNX Nifty) have an impact on the
Average Returns of ETFs.
Hypothesis 5:
H0: Independent variables (Inflation Rate and Market Return S&P BSE SENSEX) have no
impact on the Average Returns of ETFs.
Ha: Independent variables (Inflation Rate and Market Return S&P BSE SENSEX) have an
impact on the Average Returns of ETFs.

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Hypothesis 6:
H0: Independent variables (Inflation Rate and Market Return CNX Nifty) have no impact on the
Average Returns of Index Funds.
Hypothesis 7:
H0: Independent variables (Inflation Rate and Market Return S&P BSE Sensex) have no impact
on the Average Returns of Index Funds.

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DATA SOURCE
Secondary data is taken as a basis of analysis in this research. In this study, we examine ETFs
and index funds that track either the S&P BSE SENSEX index or the CNX NIFTY index. In
India, although ETFs were introduced in 2001, there are only around 40 ETFs at present. Gold
ETFs are more popular in India than ETFs that track indices. Due to the unavailability of AUM
data of some of the index funds and ETFs, the data was restricted to the following ETFs and
Index Funds:
The three ETFs examined in this study are the Goldman Sachs Nifty BeES, the Kotak Sensex
ETF, and the Kotak Nifty ETF.
The index funds that are considered in this study are growth funds that track either the S&P BSE
SENSEX or the CNX Nifty index. The nine Index Funds examined are Birla Sun Life Nifty
Index Fund, Franklin Nifty Index Fund, HDFC Index Fund – Nifty Plan, HDFC Index Fund -
Sensex Plan, IDBI Nifty Index Fund, Principal Nifty Index Fund, Reliance Index Fund - Nifty
Plan, Tata Index Fund - Sensex Plan, UTI Nifty Index Fund.
Hence, this study was restricted to three ETFs and 9 index funds.
The data was collected from the Bombay Stock Exchange, the National Stock Exchange,
www.motilaloswal.com and the respective fund houses. The daily closing prices and NAV of the
funds were considered from the January, 2010 of the funds up to March 10, 2015
Data for variable like Inflation Rate is collected from www.inflation.eu.

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Characteristics of ETFs and Index Funds
Table 1: CharacteristicsofExchange-TradedFunds
S.
NO.
ETFs
Underlying
Index
Listed
on
Launch
Date
AUM as
on
February
2015 (INR
crore
Expense
Ratio
(%)
Min. Investment
(INR)
1
Kotak Nifty
ETF
Nifty NSE
19 Jan
2010
97.90 0.49 10000
2
Goldman Sachs
Nifty
ExchangeTraded
Scheme
Nifty NSE
28 Dec
2001
724.11 0.80 10000
3
Kotak Sensex
ETF
Sensex BSE
7 May
2008
8.31 0.50 10000
The Goldman Sachs Nifty Exchange-Traded Scheme, also known as GS Nifty BeES, was the
first ETF introduced in India in 2001. Subsequently, many ETFs were introduced. At present,
there are around 40 ETFs in India. ETFs tracking indices used to be popular in India; of late
however, ETFs tracking gold are more popular with the investing fraternity. The characteristics
of the ETFs examined in this study are given in Table 1.
The GS Nifty BeES is the most popular ETF and has the highest AUM, followed by the Kotak
Nifty ETF. The expense ratio of the Kotak Nifty ETF is 0.49 and the Kotak Sensex ETF’s is
0.5% and that of the GS Nifty BeES is 0.8%. The minimum investment required for all the ETFs
is INR 10000.

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Table 2: CharacteristicsofIndex funds
S.
No.
Index Funds
Underlying
Index
Launch
Date
AUM as on
February, 2015
(INR crore)
Min.
Invest.
(INR)
Fund
Type
Exit Load
(%)
1 Birla Sun Life
Index Fund (G)
Nifty
10 Sept
2002
288.36 5000 Open 1
2
Franklin India
Index Fund-NSE
Nifty Plan (G)
Nifty
4 Aug
2000
214.82 5000 Open 1
3 HDFC Index Fund-
Nifty Plan
Nifty
3 July
2002
101.02 5000 Open 1
4 HDFC Index Fund-
Sensex Plan
Sensex
3 July
2002
88.60 5000 Open 1
5
IDBI Nifty Index
Fund (G)
Nifty
3 May
2010
96.69 5000 Open 0
6
Principal Index
Fund - (G) Nifty
30 June
1999
15.21 5000 Open 1
7
Reliance Index
Fund - Nifty (G) Nifty
9 Sept
2010
36.93 5000 Open 1
8
Tata Index Sensex
Fund - Plan A Sensex
20 Feb
2003
6.86 5000 Open 0.25
9
UTI-Nifty Index
Fund (G) Nifty
14 Feb
2000
193.24 5000 Open
Less than
15 days -
1%.
Greater
than or
equal to
15 days –
0

25
Index funds are passively managed and are designed to replicate the underlying index that they
track. Index funds hold their stocks in the same proportion as that of the underlying index. Index
funds are very popular worldwide and even in India, index funds have found favor with the
investing fraternity. The characteristics of the index funds examined in this study are given in
Table 2.
The most popular index funds are the Franklin Index Fund, the UTI Nifty Index Fund, and the
Reliance Index Fund–Nifty Plan. Birla Sun Life Index Fund (G) has the Highest AUM followed
by Franklin India Index Fund-NSE Nifty Plan (G). Second there is a recurring AMC charge
called as expense ratio which presently ranges from 1% -1.8%. This is deducted from your
investment even if there are no transactions. Finally if you redeem investment before exit period
a flat percentage is deducted as exit load. Table 2 shows that most of the index funds used in our
study have an exit load of 1% for their schemes (except IDBI Nifty Index Fund (G) and Tata
Index Sensex Fund- Plan A) and the minimum investment required is INR 5000.

26
Research Methodology
The performance of ETFs and index funds was measured by comparing their daily returns with
the returns of the underlying indices. The tracking error of ETFs and index funds was analyzed
to examine how closely the ETFs and mutual funds track their underlying indices. Tracking error
was measured as the standard deviation of the difference between the returns of the underlying
index and the returns of ETFs or index funds.
Further, Independent T-Test has been conducted to know if there is significant difference
between the tracking error of ETFs and Index Funds. The t-test is used for testing differences
between two means. A t-test for independent groups is useful when the same variable has been
measured in two independent groups. Here, Two Independent groups are: ETFs and Index Funds
and the test variable is Tracking Error of ETFs and Index Funds.
Multiple regression analysis is carried out to check the effect of market returns, and inflation rate
on the returns of ETFs and Index Funds. Multiple Regression analysis also allows us to
determine the overall fit (variance explained) of the model and the relative contribution of each
of the predictors to the total variance explained. Regression model focuses on the relationship
between a dependent and one two or more independent variables.
For the study,
There are two dependent variables resulting into 4 different results:
 ETF Returns
 Index Fund Returns
The Independent variables are as follows:
 Inflation Rates
 BSE Sensex Returns
 CNX Nifty Returns

27
Multiple regression equation used to compute the relationship is given below:
Y = α + β1X1 + β2X2
Where,
Y = Dependent Variable (ETFs Returns/ Index Funds Returns)
β1 = Slope of Inflation Rates
β2 = Slope of S&P BSE Sensex Returns/ CNX Nifty Returns
The “β” values are called the regression weights.
In this case, there are 2 predictor variables (Independent Variables), hence, 3 regression weights
are estimated, one for each of the 2 predictor variable and one for the constant (α) term. In the
Regression Analysis, Non standardized coefficients have been used, instead of standardized
coefficients. Non standardized relationships are expressed in terms of the variable’s original, raw
units. , Non standardized coefficients indicate how much the dependent variable varies with an
independent variable, when all other independent variables are held constant.

28
Performance of ETFs and Index funds
The performance of ETFs and index funds was measured by analyzing their active returns. The
analysis showed that all the ETFs considered in this study outperformed their underlying index
(Table 3). The active return for the Kotak Sensex ETF was 0.0185, followed by the Kotak Nifty
ETF with a return of 0.0149 and the GS Nifty BeES with a return of 0.0061.
In the case of index funds, the performance was mixed (Table 3). The analysis of active returns
showed that index funds that tracked the S&P BSE SENSEX and CNX Nifty have mixed
outcomes. Some of them outperformed the underlying index while others underperformed the
underlying Index. The Tata Index Sensex Fund - Plan A, the Birla Sun Life Index Fund (G), the
IDBI Nifty Index Fund (G) and the UTI – Nifty Index Fund (G) underperformed the underlying
index, the other index funds—the HDFC Index Fund-Sensex Plan, the Franklin India Index
Fund-NSE Nifty Plan (G), the HDFC Index Fund-Nifty Plan, the Principal Nifty Index Fund, and
the Reliance Index Fund - Nifty (G)—outperformed their respective indices.
Thus, the analysis showed that ETFs outperformed their underlying indices while the
performance of index funds was mixed.

29
Table 3: Active Returns of Exchange-TradedFunds and Index funds
Fund
No. of
Observations
ETF Returns
Annualized
Index Returns
Annualized
Active Returns
Exchange – Traded Funds
Kotak Nifty ETF
1239 0.819872624 0.804914178 0.014958446
GS Nifty BeES
1291 0.671139274 0.665083521 0.006055753
Kotak Sensex ETF
1268 0.653597 0.635076683 0.018520317
Index Funds Tracking S&P BSE SENSEX
HDFC Index Fund-
Sensex Plan
1182 0.658939 0.635076683 0.023862317
Tata Index Sensex Fund -
Plan A
1012 0.411117 0.43385808 -0.02274108
Index Funds Tracking CNX Nifty
Birla Sun Life Index
Fund (G)
1223 0.639066 0.665083521 -0.026017521
Franklin India Index
Fund-NSE Nifty Plan (G)
1350 0.667509596 0.665083521 0.002426074
HDFC Index Fund-Nifty
Plan
1181 0.665119136 0.665083521 0.000035615
IDBI Nifty Index Fund
(G)
1004 0.42143 0.440489116 -0.019059116
Principal Index Fund -
(G)
1279 0.67236 0.665083521 0.007276479
Reliance Index Fund -
Nifty (G)
1019 0.471858 0.440489116 0.031368884
UTI-Nifty Index Fund
(G)
1001 0.43987 0.440489116 -0.000619116

30
Tracking Error of Funds
The tracking error of funds in relation to the underlying index was also examined for ETFs and
index funds. Frino and Gallagher (2001) suggested different methods for calculating the tracking
error of funds. In the extant literature, the most commonly used method to calculate tracking
error is the standard deviation of the difference between the returns of the underlying index and
the returns of the ETFs or index funds. This method was adopted in this study. The various
factors responsible for tracking error are transaction costs, fund cash flows, benchmark volatility,
and the replication strategy adopted by the funds. Table 4 shows the tracking error of the ETFs
and the index funds considered in this study with respect to their underlying index.
Table 4: Tracking Errorof Exchange-TradedFunds and Index funds
Fund
No. of
Observations
Tracking Error
Exchange Traded Funds
Kotak Nifty ETF 1239 0.047212588
GS Nifty BeEs 1291 0.008169263
Kotak Sensex ETF 1268 0.040345204
Index Funds Tracking S&P BSE Sensex
HDFC Index Fund-Sensex Plan 1182 0.011183719
Tata Index Sensex Fund - Plan A 1012 0.004806641
Index Funds Tracking CNX Nifty
Birla Sun Life Index Fund (G) 1223 0.017130202
Franklin India Index Fund-NSE Nifty Plan (G) 1350 0.001608218
HDFC Index Fund-Nifty Plan 1181 0.004509319
IDBI Nifty Index Fund (G) 1004 0.014473892
Principal Index Fund - (G) 1279 0.005420746
Reliance Index Fund - Nifty (G) 1019 0.003867541
UTI-Nifty Index Fund (G)
1001 0.003317917

31
We found the tracking error of the GS Nifty BeES to be the lowest at 0.008169, followed by that
of the Kotak Sensex ETF (0.04035) and the Kotak Nifty ETF (0.04721). The analysis of the
index funds that tracked the S&P BSE SENSEX showed that the tracking error was minimal—
the Tata Index Sensex Fund - Plan A had the lowest tracking error 0.0048, HDFC Index Fund-
Sensex Plan with tracking error 0.01118.
The tracking error analysis performed for the index funds that tracked the CNX Nifty index also
revealed that the tracking error was minimal. The tracking error of 0.001608 for the Franklin
India Index Fund-NSE Nifty Plan (G) was the lowest in the study, followed by the UTI Nifty
Index Fund (G) and Reliance Index Fund - Nifty (G) the with a tracking error of 0.00332 and
0.0039, respectively. The Birla Sun Life Index Fund (G) had the maximum tracking error of
0.01713.
The tracking error analysis of the ETFs and the index funds threw up some interesting facts. The
analysis showed that the average tracking error of the ETFs tracking the SENSEX and the Nifty
indices is actually higher than that of index funds. One possible explanation for the tracking error
of ETFs being higher is the higher bid-ask spreads of ETFs compared to those of the index funds
(Kostovetsky, 2003). The other possible factors that could lead to tracking error are transaction
costs, volatility of the benchmark index, index composition changes, and corporate activity
(Chiang 1998).
Further, Independent T-Test conducted using SPSS was conducted. It tells a different story. The
analysis shows that there is no significant difference between the means of tracking error of the
ETFs and Index Funds. However, Levene’s Test for Equality of Variances shows that the
variability in ETFs and Index Funds is not the same.

32
Independent T- Test
In the Group Statistics box, the mean for ETFs is 0.319. The mean for Index Fund is 0.007. The
standard deviation for ETF is 0.208 and for Index Fund is 0.005.
Independent Samples Test
Levene's Test for Equality of
Variances
t-test for Equality
of Means
F Sig. t df
Tracking_Err
or
Equal variances
assumed
16.880 .002 3.494 10
Equal variances not
assumed
2.016 2.093
Levene’s Test for Equality of Variances is a test that determines if the two conditions have
about the same or different amounts of variability between scores. The value in the Sig. column
is 0.02. A value less than .05 means that the variability in your two conditions is not the same.
t-test for Equality of Means
Sig. (2-tailed) Mean
Difference
Std. Error
Difference
Tracking_Error
Equal variances assumed .006 .024540330 .007022675
Equal variances not
assumed
.176 .024540330 .012172398
Sig. (2-tailed) value tells if the two condition Means are statistically different. Here the value to
take into consideration is 0.176 and hence null hypothesis accepted.
Group Statistics
Security_Ty
pe
N Mean Std.
Deviation
Std. Error
Mean
Tracking_Err
or
ETF 3 .03190902 .020843997 .012034288
INDEX
FUND
9 .00736869 .005485320 .001828440

33
t-test for Equality of Means
95% Confidence Interval of the
Difference
Lower Upper
Tracking_Error
Equal variances assumed .008892834 .040187826
Equal variances not assumed -.025662476 .074743136

34
Multiple Regression Analysis
1. Dependent variable is Average ETF Returns and Independent variables
are inflation rate and CNX Nifty Average returns
Descriptive Statistics
Mean Std.
Deviation
N
AVERAGE_RETURN
S_ETF
.09259633 .224524065 4
INFLATION_Rate .08170000 .024455674 4
MARKET_RETURNS
_NIFTY
.09956201 .257896159 4
Correlations
AVERAGE_
RETURNS_
ETF
INFLATION
_Rate
MARKET_R
ETURNS_NI
FTY
Pearson
Correlation
AVERAGE_RETURN
S_ETF
1.000 .239 .995
INFLATION_Rate .239 1.000 .306
MARKET_RETURNS
_NIFTY
.995 .306 1.000
Sig. (1-tailed)
AVERAGE_RETURN
S_ETF
. .380 .003
INFLATION_Rate .380 . .347
MARKET_RETURNS
_NIFTY
.003 .347 .
N
AVERAGE_RETURN
S_ETF
4 4 4
INFLATION_Rate 4 4 4
MARKET_RETURNS
_NIFTY
4 4 4
The Correlations table shows the “Pearson’s r” value. The Pearson’s r for the correlation
between the average returns of ETFs and inflation rate, and inflation rate and market returns is

35
0.239 and 0.306 respectively. This means that there is a weak relationship between the two
variables. This means that changes in one variable are not correlated with changes in the second
variable. On the other hand, the Pearson’s r for the correlation between the average returns of
ETFs and market return is 0.995. This means that changes in one variable are strongly correlated
with changes in the IVs.
Model Summary
Mode
l
R R Square Adjusted R
Square
Std. Error of
the Estimate
1 .997a .995 .984 .028337261
a. Predictors: (Constant), MARKET_RETURNS_NIFTY,
INFLATION_Rate
This table tells what % of variability in the DV is accounted for by all of the IVs together (it’s a
multiple R-square).
ANOVAa
Model Sum of
Squares
df Mean
Square
F Sig.
1
Regression .150 2 .075 93.668 .073b
Residual .001 1 .001
Total .151 3
a. Dependent Variable: AVERAGE_RETURNS_ETF
b. Predictors: (Constant), MARKET_RETURNS_NIFTY, INFLATION_Rate
This table gives an F-test to determine whether the model is a good fit for the data. According to
this p-value, it is not. Since the Sig. value is 0.07 which is greater than 0.05 shows that the model
is not a good fit by accepting null hypothesis i.e. the model is not a good fit for data.

36
Coefficientsa
Model Unstandardized
Coefficients
Standardized
Coefficients
t
B Std. Error Beta
1
(Constant) .059 .058 1.020
INFLATION_Rate -.663 .703 -.072 -.944
MARKET_RETURNS
_NIFTY
.885 .067 1.017 13.288
Again, this table gives beta coefficients so that the regression equation can be constructed. .
Based on this table, the equation for the regression line is:
ETFs Average return = 0.59 – 0.663(Inflation Rates) + 0.885(Market Returns_Nifty)

37
2. Dependent variable is Average ETF Returns and Independent variables
are inflation rate and S&P BSE SensexAverage Returns
Mean Std.
Deviation
N
AVERAGE_RETURN
S_ETF
.09259633 .224524065 4
INFLATION_Rate .08170000 .024455674 4
MARKET_RETURNS
_BSE
.09645158 .245040332 4
Correlations
AVERAGE_
RETURNS_
ETF
INFLATION
_Rate
MARKET_R
ETURNS_B
SE
Pearson
Correlation
AVERAGE_RETURN
S_ETF
1.000 .239 .997
MARKET_RETURNS
_BSE
.997 .303 1.000
Sig. (1-tailed)
AVERAGE_RETURN
S_ETF
. .380 .001
MARKET_RETURNS
_BSE
.001 .348 .
N
AVERAGE_RETURN
S_ETF
4 4 4
MARKET_RETURNS
_BSE
4 4 4

38
The Pearson’s r for the correlation between the average returns of ETFs and inflation rate, and
inflation rate and market returns is 0.239 and 0303 respectively. This means that there is a weak
relationship between the two variables. This means that changes in one variable are not
correlated with changes in the second variable. On the other hand, the Pearson’s r for the
correlation between the average returns of ETFs and market return is 0.997. This means that
changes in one variable are strongly correlated with changes in the IVs.
Model Summary
Mode
l
Square
Std. Error of
the Estimate
1 1.000a .999 .998 .010232640
a. Predictors: (Constant), MARKET_RETURNS_BSE,
INFLATION_Rate
The coefficient of determination is 0.999; therefore, about 99.9% of the variation in the ETFs
Average Return is explained by the independent variable i.e. market return. The regression
equation appears to be very useful for making predictions since the value of R Square is close to
1.
ANOVAa
Model Sum of
Squares
df Mean
Square
F Sig.
1
Regression .151 2 .076 721.674 .026b
Total .151 3
a. Dependent Variable: AVERAGE_RETURNS_ETF
b. Predictors: (Constant), MARKET_RETURNS_BSE, INFLATION_Rate
this p-value, it is. Since the Sig. value is 0.02 which is lesser than 0.05 which shows that the
model is a good fit by rejecting null hypothesis i.e. the model is not a good fit for data.

39
Coefficientsa
Coefficients
Standardized
Coefficients
t
B Std. Error Beta
1
(Constant) .055 .021 2.650
INFLATION_Rate -.641 .254 -.070 -2.530
MARKET_RETURNS
_BSE
.933 .025 1.019 36.889
ETFs Average return = 0.55 – 0.641(Inflation Rates) + 0.933(Market Returns_BSE)

40
3. Dependent variable is Average Index Fund Returns and Independent
variables are inflation rate and CNX Nifty Average Returns
Mean Std.
Deviation
N
AVERAGE_RETURN
S_IndexFunds
.09798895 .254720820 4
INFLATION_Rate .08170000 .024455674 4
MARKET_RETURNS
_NIFTY
.09956201 .257896159 4
Correlations
AVERAGE_
RETURNS_I
ndexFunds
INFLATION
_Rate
MARKET_R
ETURNS_NI
FTY
Pearson
Correlation
AVERAGE_RETURN
S_IndexFunds
1.000 .303 1.000
MARKET_RETURNS
_NIFTY
1.000 .306 1.000
Sig. (1-tailed)
AVERAGE_RETURN
S_IndexFunds
. .349 .000
MARKET_RETURNS
_NIFTY
.000 .347 .
N
AVERAGE_RETURN
S_IndexFunds
4 4 4
MARKET_RETURNS
_NIFTY
4 4 4

41
The Pearson’s r for the correlation between the average returns of Index Funds and inflation rate,
and inflation rate and market returns is 0.303 and 0.306 respectively. This means that there is a
weak relationship between the two variables. This means that changes in one variable are not
correlation between the average returns of ETFs and market return is 1. This means that changes
in one variable are strongly correlated with changes in the IVs.
Model Summary
Mode
l
Square
Std. Error of
the Estimate
1 1.000a .999 .998 .011939009
a. Predictors: (Constant), MARKET_RETURNS_NIFTY,
INFLATION_Rate
The coefficient of determination is 0.999; therefore, about 99.9% of the variation in the Index
Funds Average Return is explained by the independent variable i.e. market return. The regression
equation appears to be very useful for making predictions since the value of R Square is close to
1.
ANOVAa
Model Sum of
Squares
df Mean
Square
F Sig.
1
Regression .195 2 .097 682.284 .027b
Total .195 3
a. Dependent Variable: AVERAGE_RETURNS_IndexFunds
b. Predictors: (Constant), MARKET_RETURNS_NIFTY, INFLATION_Rate

42
Coefficientsa
Coefficients
Standardized
Coefficients
t
B Std. Error Beta
1
(Constant) .003 .024 .104
INFLATION_Rate -.036 .296 -.003 -.121
MARKET_RETURNS
_NIFTY
.988 .028 1.001 35.204
Index Funds Average return = 0.003 – 0.036(Inflation Rates) + 0.988(Market
Returns_Nifty)

43
4. Dependent variable is Average Index Fund Returns and Independent
variables are inflation rate and S&P BSE SensexAverage Returns
Mean Std.
Deviation
N
AVERAGE_RETURN
S_IndexFunds
.09798895 .254720820 4
INFLATION_Rate .08170000 .024455674 4
MARKET_RETURNS
_BSE
.09645158 .245040332 4
Correlations
AVERAGE_
RETURNS_I
ndexFunds
INFLATION
_Rate
MARKET_R
ETURNS_B
SE
Pearson
Correlation
AVERAGE_RETURN
S_IndexFunds
1.000 .303 1.000
MARKET_RETURNS
_BSE
1.000 .303 1.000
Sig. (1-tailed)
AVERAGE_RETURN
S_IndexFunds
. .349 .000
MARKET_RETURNS
_BSE
.000 .348 .
N
AVERAGE_RETURN
S_IndexFunds
4 4 4
MARKET_RETURNS
_BSE
4 4 4
The Pearson’s r for the correlation between the average returns of Index Funds and inflation rate,
and inflation rate and market returns is 0.303 and 0.303 respectively. This means that there

44
is a weak relationship between the two variables. This means that changes in one variable are not
correlation between the average returns of ETFs and market return is 1. This means that changes
in one variable are strongly correlated with changes in the IVs.
Model Summary
Mode
l
Square
Std. Error of
the Estimate
1 1.000a 1.000 .999 .008246593
a. Predictors: (Constant), MARKET_RETURNS_BSE,
INFLATION_Rate
The coefficient of determination is 1; therefore, the variation in the Index Funds Average Return
is explained by the independent variable i.e. market return.
ANOVAa
Model Sum of
Squares
df Mean
Square
F Sig.
1
Regression .195 2 .097 1430.604 .019b
Total .195 3
a. Dependent Variable: AVERAGE_RETURNS_IndexFunds
b. Predictors: (Constant), MARKET_RETURNS_BSE, INFLATION_Rate

45
Coefficientsa
Coefficients
Standardized
Coefficients
t
B Std. Error Beta
1
(Constant) -.002 .017 -.115
INFLATION_Rate -.004 .204 .000 -.021
MARKET_RETURNS
_BSE
1.039 .020 1.000 50.977
Index Funds Average return = -0.002 – 0.004(Inflation Rates) + 1.039(Market
Returns_Nifty)

46
Correlation Analysis
Mean Std.
Deviation
N
AVERAGE_RETURN
S_ETF
.09259633 .224524065 4
AVERAGE_RETURN
S_IndexFunds
.09798895 .254720820 4
Correlations
AVERAGE_
RETURNS_
ETF
AVERAGE_
RETURNS_I
ndexFunds
AVERAGE_RETURN
S_ETF
Pearson
Correlation
1 .997**
Sig. (2-tailed) .003
N 4 4
AVERAGE_RETURN
S_IndexFunds
Pearson
Correlation
.997** 1
Sig. (2-tailed) .003
N 4 4
**. Correlation is significant at the 0.01 level (2-tailed).
Pearson Correlation - These numbers measure the strength and direction
of the linear relationship between the two variables. The correlation
coefficient can range from -1 to +1, with -1 indicating a perfect negative
correlation, +1 indicating a perfect positive correlation, and 0 indicating no
correlation at all.
Sig. (2-tailed) - This is the p-value associated with the correlation. The
footnote under the correlation table explains what the single and double
asterisks signify.

47
Conclusions
This study examined the performance of ETFs and index funds that tracked their underlying
index, either the S&P BSE SENSEX index or the CNX Nifty index. The study examined the
tracking error of ETFs and index funds. This study was limited to only some and restricted to
those funds for which data was available.
From the analysis of the active returns of ETFs, we found that ETFs outperformed their
underlying index—the S&P BSE SENSEX or the CNX Nifty. On the other hand, the index funds
showed mixed results. The reason why ETFs outperformed their underlying index could be their
lower expense ratios. Since index funds have higher management fees and are also subject to
higher capital gains tax compared to ETFs, underperformance would be seen more in the case of
index funds than in the case of ETFs.
Further, the analysis revealed that the tracking error was minimal and insignificant for most of
the funds. More importantly, the tracking error was higher for the ETFs compared to the index
funds. Funds do maintain some portion of their capital as cash and are not fully invested in
stocks, which could be the cause of tracking error, apart from other factors such as the volatility
of the benchmark, the replication strategy followed by the fund, and the transaction costs
involved (Chiang, 1998). The tracking error of ETFs was found to be higher than that of index
funds; this was probably due to the higher bid-ask price of ETFs. Thus, the analysis highlighted
that ETFs performed better than index funds; this finding is similar to the findings reported in
Svetina (2010).
In India, although ETFs have been in existence for more than a decade, they are making their
presence felt slowly. The major reason why ETFs have not caught up as much in India as they
have in the U.S. and in Europe is probably because of the lesser incentives to market ETFs as
compared to mutual funds, which earmark higher amounts for marketing their products.
Moreover, the ETFs in India are passively managed. If the ETFs were to be actively managed
(thereby giving higher returns to the investors), ETFs would definitely catch the attention of the
investing fraternity. Policymakers should come up with better policies to enhance the growth of
ETFs. Moreover, since ETFs are one of the modes of disinvestment in the future, policymakers
should actively consider promoting the growth of ETFs.

48
Limitations
The major limitation of this study is that the sample size was reduced considerably due to the
non-availability of data. Further, the results of this study could have been different if more
number of mutual fund schemes were included for analysis. The other limitation of this study is
that there may be structural breaks in the time period and this has not been considered in the
study. The study also has not considered macroeconomic factors like exchange rate and political
risks which could have impacted the performance of the funds.

49
Bibliography
 Wikipedia
 Investopedia
 www.moneycontrol.com
 P. Krishna Prasanna study on
Performance of Exchange-Traded Funds in India
 www.etfguide.com
 www.nseindia.com
 www.bseindia.com
 www.valueresearchonline.com
 www.yahoofinance.com
 Respective Fund Houses of ETFs and Index Funds
 www.personalfn.com
 www.investinganswers.com
 www.onemint.com
 http://articles.economictimes.indiatimes.com/2013-04-29/news/38904782_1_expense-
ratio-index-funds-active-funds
 http://www.forbes.com/sites/mitchelltuchman/2013/11/01/index-fund-vs-etfs-get-the-
facts/
 http://www.moneycontrol.com/master_your_money/stocks_news_consumption.php?auto
no=890915

50
Appendices
ETFs
1. Kotak Nifty ETF-The scheme is ranked 2 in Index category by CRISIL (for quarter
ended Mar 2014).
Historic Graph: Good performance in the category
Chart 1: Closing prices, and NAVs of Benchmark
2. GS Nifty BeEs- The scheme is is ranked 1 in Index category by CRISIL (for quarter
ended Mar 2014).
Historical Graph: Very Good performance in the category.
Chart 2: Closing Prices, and NAVs of Benchmark

51
3. Kotak SensexETF- This scheme is not ranked by CRISIL (for quarter ended Mar 2014)
since it does not fulfill certain eligibility criteria of CRISIL.
Historical Graph:
Index Funds
1. Birla Sun Life Index Fund (G) - The scheme is ranked 5 in Index category by
CRISIL (for quarter ended Mar 2014).
Historical Graph: Relatively Weak performance in the category

52
2. Franklin India Index Fund-NSE Nifty Plan (G) -The scheme is ranked 4 in
Index category by CRISIL (for quarter ended Mar 2014).
Historical Graph: Below average performance in the category
3. HDFC Index Fund-Nifty Plan- The scheme is ranked 3 in Index category by
Historical Graph: Average performance in the category.

53
4. HDFC Index Fund-SensexPlan- The scheme is ranked 3 in Index category by
5. IDBI Nifty Index Fund (G) - The scheme is ranked 3 in Index category by CRISIL
(for quarter ended Mar 2014).

54
Principal Index Fund - (G) - This scheme is not ranked by CRISIL (for quarter ended Mar
2014) since it does not fulfill certain eligibility criteria of CRISIL.
Historical Graph:
6. Reliance Index Fund - Nifty (G) - The scheme is ranked 3 in Index category by

55
7. Tata Index SensexFund - Plan A- This scheme is not ranked by CRISIL (for
quarter ended Mar 2014) since it does not fulfill certain eligibility criteria of CRISIL.
Historical Graph:
8. UTI-Nifty Index Fund (G) - The scheme is ranked 3 in Index category by CRISIL
(for quarter ended Mar 2014).

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