Examining the performance and relationship between bank ETFs and their underlying index in India

Abstract

Exchange traded funds (ETFs) have completed a decade of their presence in Indian capital markets their popularity has grown very recently. Since the ETFs are issued on the basis of their underlying assets, their price movements are supposed to follow the underlying index. This attempt to evaluate the risk returns perspective of entire Bank ETFs. The data has been collected for the purpose of analyzing trends and progress of ETFs and Index funds in India. It also covers the trends and progress of ETFs and Indices in India and to evaluate the performance of ETFs vis-a-vis Index in India. It examines the characteristics of bank ETFs, compares the performance of the bank ETFs with its benchmark. The paper further evaluates cointegration between ETFs in India and those of their underlying Index using the econometric technique of cointegration test. The findings suggest that correlation is stronger in bank ETF and the Index and they have a long term relationship. The paper further evaluates co-movement between of ETFs those of their underlying Index using the econometric technique of Vector Autoregressions and results suggest that ETFS typically reflect the movements of the benchmark index. Hence, looking at the performance of benchmark indices of India, retail investor can also expect similar kind of returns from the ETFs. Hence Exchange Traded Fund (ETF) remains the significant area of the investment.