Exchange-traded funds (ETFs), which aim to give identical returns to that of an index, are seeing wider tracking errors amid the recent market volatility | Photo: PTI
Nifty at critical juncture
The benchmark Nifty
on Friday ended at 8,084, its lowest close since March 24. Technical analysts say the 50-share index is hanging around key support levels. “If the Nifty
holds on to 8,000, it can go towards 8,300. If it falls, it could re-test recent lows of 7,600,” said an analyst. Market players said the cooling off of India VIX is positive, as it signals less volatile moves in the short term. Last week, the volatility indicator fell sharply even as the Nifty fell 6.5 per cent. Analysts, however, say the weakness in financial stocks is a pain-point for the market.
ETFs see wider tracking errors
Exchange-traded funds (ETFs), which aim to give identical returns to that of an index, are seeing wider tracking errors amid the recent market volatility. According to industry experts, the sharp volatility in the markets
has exposed the lack of liquidity in ETFs.
"There have been instances when Nifty ETFs
have not been able to track performance of the index during intra-day trade. During intra-day sessions, when the Nifty has fallen 6-7 per cent, the price of the ETF still appears in positive territory. Similarly, when the index is up over 4-5 per cent, the ETF doesn't reflect similar gains in intra-day trade," said head of a broking house. "There are not enough market-makers on exchanges to support trading in these instruments, especially during highly volatile periods. Only at end of the day, the net asset values of the ETFs adjust as per the day's closing price," he added.
The sharp fall in the market and sudden stoppage in the economic activity is likely to take a heavy toll on the broking industry. Sources say many large brokerages are in the process of announcing job and salary cuts. “It is a challenging time for the broking industry. Many have high operating costs and wage bill. Most players are grappling with liquidity crunch as trading volumes have dried out and fall in asset prices have depleted collateral value. “The spike in volatility is discouraging traders from taking aggressive bets. Also, collection of funds has become a challenge due to the lockdowns. We don’t expect things to revert to normal in a hurry. Most have no options but to cut salary or staff,” said an industry official.