Moneycontrol Pro Panorama | Is the volume surge in ETFs a flash in the pan?

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

Traders normally track the volume of a stock or of the derivative market to get an idea of market direction. If unusually high volume takes place after a sharp rally, it is considered to be a short-term top. Similarly, if high volume takes place after a rapid fall, then it is construed as a temporary bottom.

While this is a known strategy for the cash and derivative market, for the first time, a sharp rise in volume has been observed in a mutual fund, an exchange traded fund (ETF), to be precise.

Nifty Bees, a passive fund managed by Nippon India Asset Management and one that mimics the Nifty 50 index, saw the highest ever volume in its 20-year history on Monday.

ETFs generally do not attract very high volumes and need market makers to offer liquidity. But on a day that the market crashed, Rs 205 crore of ETF units changed hands. With 75 percent of the 88,117 trades marked for delivery, the trade indicates coordinated buying. For 2021, the daily average Nifty Bees volume was Rs 29.21 crore.

Apart from the Nippon ETF, other funds also saw higher volumes, with a total of Rs 281 crore of ETFs being purchased, with SBI, ICICI and HDFC AMCs getting the remaining business.

ETFs have an advantage of being a low-cost way of buying a passive fund. Over the last few years, investors have been moving their money from actively managed funds to passively managed ETFs. Reports say that over a period of 10 years, nearly two-thirds of actively managed large-cap funds have underperformed the index.

Globally, ETFs are one of the most traded instruments in the market. Does the sharp increase in volume in Nifty Bees indicate that a similar pattern will follow in India?

It’s too early to say. Firstly, the next day’s volume was back in the usual range and Wednesday also showed a similar pattern. Reports say that investors jumped into ETFs because they discovered the advantage of low cost offered by ETFs. It’s a bit difficult to believe that the advantage of ETFs dawned on so many investors on the same day, and then did not sustain.

With Rs 205 crore of volume on 88,117 trades, the average purchase was roughly Rs 23,000. This ticket size fits that of a retail investor. But it is also possible that a few big investors may have spread their trade throughout the day and bought the ETF in small quantities. As the counter has active market maker participation, the purchase orders got filled throughout the day.

There are two reasons that a large quantity may have been bought in a single day. First, as explained earlier, the investor or a handful of big investors felt a temporary market bottom is being made and decided to invest in Nifty Bees, rather than the costlier option of investing in an actively managed fund or buying Nifty in the futures’ market.

A second possibility is a change in rules on margin that market participants are expecting will be imposed by the market regulator in February. Presently, many traders use shares in their portfolios as a margin. The exchange allows a haircut on this portfolio and permits the remaining value of the portfolio as a margin. This rule is likely to change with SEBI insisting on a higher cash component from February. Nifty Bees are also permitted as margin and since it displays the lowest volatility among available options, it has the lowest haircut. Thus, for the same value of a portfolio held in Nifty Bees versus shares, a trader can enjoy a higher exposure. Savvy investors who bought the Nifty Bees also timed their entry well by buying ETFs cheap.

If the possibility of being a better instrument for margin is the main reason for the purchases, we may see volume in Nifty Bees increase over the next few weeks.

Whatever may be the reason for the purchase, there is no denying that the ETFs finally had their day under the sun.

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(These are published every trading day before markets open and can be read on the app)

Shishir Asthana
Moneycontrol Pro