Millennials could look at ETFs as an investment option amid a spike in volatility

The last 18 months have been very pleasant for all the investors who were directly investing into the stock market, especially the millennials who are very comfortable making investment choices through just a few clicks.

The Indian equity market along with the global market has been on a one-way rally lifting almost all the major indices just like a rising tide lifts all boats. However, as the market valuations become expensive, there could be an uptick in market volatility.

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We spoke to Nitin Kabadi, Head - ETF Business, ICICI Prudential AMC on what are different approaches investors could take amid a rise in volatility.

In such a situation, millennial investors are more likely to be caught in the whirlpool of market volatility leading to negative investment experience as and when the markets turn volatile or correct.

Hence, instead of direct investing which requires loads of market and stock-specific research, why not consider investing in an instrument that will provide returns that mirror returns of benchmark indices such as the S&P BSE Sensex or the Nifty 50?

The instrument under consideration here is the Exchange Traded Fund, abbreviated as ETF.  

For the uninitiated, ETF is a type of investment fund made up of a basket of securities. ETFs provide investors with diversification benefits at low costs.

ETFs are traded on the stock exchange just like equity shares. ETFs can be traded (bought or sold) at any time during market hours.

Generally, most ETFs are index funds, that is, they hold the same securities as a stock market index and that too in the same proportion.

Since they replicate the index holdings, ETFs tend to generate returns similar to that of the underlying index. This means a Nifty 50 Index ETF will hold all the Nifty 50 stocks in the same proportion as the Index.

If the Nifty 50 goes up, the returns from the ETF will go up and vice versa.

Thus, with an ETF, you get to generate market-linked returns, at a low cost and without taking the risks associated with direct investing.

Furthermore, today, there is a variety of ETFs available, from which an investor can choose based on one’s risk appetite and financial goal.

For example, if you are an investor looking to invest in large caps, then you have the option of investing in a Sensex/Nifty/Nifty 100 based ETF.  Similarly, there is another market capitalisation (midcaps) based ETFs available.

On the other hand, if you are an investor having a strong view of a sector and are confident about its prospects then you have the option of opting for a sector-based ETF.

Such ETFs are designed to track a particular sectoral index. Here, the entire portfolio will be concentrated on a single sector. Some of the sectoral ETFs available are Bank ETF, Private Bank ETF, IT ETF, Healthcare ETF, FMCG ETF etc.

Savvy investors are investing money in the Smart Beta ETF category. Smart beta ETFs follow a rule-based stock selection approach for portfolio construction by applying factors such as low volatility, alpha, value, quality, dividend yield etc.

If you are an investor looking for low volatility-based products, then one can consider a single factor smart beta ETF based on low volatility such as the Nifty Low Vol 30 ETF.

Here the portfolio will consist of 30 large-cap stocks with lower volatility. Another smart beta offering one can consider is a multi-factor product such as the Alpha Low Vol 30 ETF. This product is based on two factors – Alpha and Low Volatility.

The portfolio here will consist of 30 stocks, selected from a universe of 150 Large and Midcap stocks, that have recently outperformed the broader market yet are relatively less volatile.

The aim of these smart beta strategies is to deliver superior risk-adjusted returns to their investors. Finally, if you are looking for a commodity-based ETF, you can consider Gold ETF.

To conclude, ETFs can be a low-cost, one-stop solution for your equity investing needs without having to worry about matters related to stock selection, portfolio diversification etc.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)