Performance Evaluation of select Exchange Traded Funds and its benchmark in India

Harsh Kumar Anchalia

ABSTRACT

Mutual funds are investment vehicles which pool money from various individual investors and are
managed by professional fund managers. In India there are varieties of mutual funds namely Equity
funds, Debt funds, Liquid funds, Balance funds, Exchange Traded Funds (ETFs) etc. This study
focuses on four Exchange Traded Funds (ETFs) namely Aditya Birla Sun Life Gold ETF, Axis
Gold ETF, HDFC Gold Exchange Traded Fund and SBI-ETF Gold. All these funds have Nifty 50
as their benchmark. To compare the performance of these funds Average returns, Standard
deviation, Beta, Sharpe ratio, Treynor ratio, Jensen alpha, Sortino ratio and Information ratio were
calculated for five financial years (April 1st 2015 to March 31st 2020). The results suggest that all
the schemes have better returns than Nifty 50 and all the schemes have defensive relationship with
market.

Keywords: Exchange Traded Funds (ETFs), Information ratio, Jensen alpha, Mutual Funds, Risk-
Return performance, Sharpe ratio, Sortino ratio and Treynor ratio

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 1. Introduction

A. About Mutual Funds

Mutual funds are investment tools which pool money from various investors to increase the returns
of their holdings using a number of securities such as bonds, money market instruments, gold,
stocks etc to their portfolio.

Advantages:

 Diversification: One mutual fund can hold many securities. This diversification
significantly reduces the risk of loss if invested in single security.
 Professional Management: Many people believe that they understand the market and many
of them end up incurring loss. The advantage of investing in mutual funds is that these are
managed by professional experts which ensures that the money is invested in the right place.
 Liquidity: Mutual fund units can be bought and sold on any business day provided the
market is open hence investors have an easy access to their money.
 Flexibility: Mutual funds manage several types of funds hence an investor is provided with
an opportunity to switch between these funds at little or no charge.

Disadvantages

 Return Depends on Fund Manager: As it is managed by professional experts, the return on

investment is subject to manager’s skill and judgment.

B. About Exchange Traded Funds

As defined by Association of Mutual Funds in India (AMFI) “An ETF or exchange traded fund, is
a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index
fund.” The main variation between ETFs and other index funds is that ETFs simply replicate the
performance of the Index rather than trying to outperform their corresponding index. As the fund
manager just replicates the performance of corresponding index it requires lower administrative
costs than actively managed portfolios, also they tend to have lower expense ratio compared to
other funds.

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According to Association of Mutual Funds in India (AMFI), below are the advantages of investing
in Exchange Traded Funds:

 Asset Allocation
 Cash Equitisation
 Hedging Risks
 Arbitrage (cash vs futures) and covered option strategies

2. Review of Literature

Solanki A (et al., 2016) tried to evaluate the performance of Reliance open-ended equity schemes
with growth option all schemes except Reliance Focused Large Cap Fund showed an average
return higher than in comparison to the market return (BSE 100 and SENSEX). Sukhwinder Kaur
Dhanda, Dr. G.S.Batra and Dr Bimal Anjum (2012) studied the performance evaluation of selected
open ended schemes for the period 1st April 2009 to 31st March 2011. It was found that excluding
one scheme all were able to offer reward for variability and volatility more than the benchmark for
the period 2009-2010 while in the period 2010-2011 all the schemes have failed to give more
reward for variability than benchmark and just four schemes were able to give reward for volatility
than benchmark.

Dr.R.Narayanasamy and V. Rathnamani (2013) studied the performance of five selected equity
large cap mutual fund schemes for the period January 2010 to Dec 2012 through various statistical
parameters. This study determined that all the funds have performed well in the high volatile
market movement expect Reliance vision even though there was a fall in the CNX NIFTY during
the year 2011. Dr Vikas Choudhary and Preeti Sehgal Chawla (2014) studied the performance of
the growth oriented equity diversified schemes by assessing various financial tests. It was found
that all the funds were less risky than the market portfolio. Results implied that seven out of eight
funds have performed better in proportion to the risk taken by the fund. Mr.U.Rambab, Smt.R.Jeya
Lakshmi and B.Kalyan Kumar (2018) assessed six equity linked saving schemes in mutual funds.
The results have shown all the funds are more risky than the market, have higher diversification
of portfolio and have performed better in proportion to the risk taken by the fund.

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Dr. Khalid Ashraf Chisti and Mr. Amir Rahman (2018) assessed the performance of top 10 tax
saving mutual fund schemes for the period April 2007-March 2017. It was found that that all ELSS
funds have outperformed the market. Dr. Naliniprava Tripathy (2004) evaluates the performance
of 31 tax planning schemes in India over the period 1994-1995 to 2001-2002 in terms of six
performance measures to find that there was no proper balance between selectivity and
diversification is because of fund manager’s poor judgement of selectivity and investment
planning.

Sharad Panwar and Dr. R. Madhumathi (2006) compared public-sector sponsored & private-sector
sponsored mutual funds for the period May 2002 to May 2005 to find out that the public-sector
sponsored funds and private-sector sponsored fund do not differ considerably in terms of mean
returns but differ in average standard deviation, average variance and average coefficient of
variation.

Geeta Rani and Dr. Vijay Singh Hooda (2017) assessed the performance of mutual fund schemes
ranked one by CRISIL and found that all the selected funds outperformed the market and showed
better risk adjusted performance. The study concluded that during the period of demonetization in
November 2016, all the schemes showed negative returns.

Shefali Gupta, S.K Shrivastava and Vinod Bhatnagar (2015) evaluated the performance of five
sectoral mutual funds for the period 2008-2013 to find that all selected sectoral fund have positive
returns.

3. Objective

 To analyse Risk and Returns of both the selected Exchange Traded Funds.
 To evaluate the relative performance of the selected Exchange Traded Funds to Nifty 50.

4. Methodology

The present study is based on secondary data of Mutual fund schemes, Nifty 50 and 10 year
Government Bond (risk free asset) which is collected from their official websites and
Moneycontrol. To compare these schemes with the market this study focused on their risk and

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return factors. Various financial tools like Beta, Standard deviation, Sharpe ratio, Treynor Ratio
etc were used to evaluate the performance of these mutual fund schemes.

5. Scope of the Study

This study comprises of four mutual fund schemes for the period April 1st 2015 to March 31st
2020. The NAV of the selected schemes were compared with their annual returns and then they
have been compared with the benchmark Nifty 50 returns to evaluate the performance of these
schemes.

6. The Basic Concepts

C. Standard deviation (SD)

Risk can be measured by finding out the magnitude of its deviation from the expected outcome.
That magnitude can be found using Standard Deviation. Standard deviation is the mean variation
in a set of data values from its average (expected outcome). A low standard deviation tells us that
most of the data is very close to average which makes it less risky, while a high standard deviation
means that a lot of data is far from the average value making it more risky.

Sum of squared difference between each monthly return and its mean
SD = Square root of ---------------------------------------------------------------------------------------
N-1

D. Beta

It measures a fund's volatility to that of its benchmark. It shows how much a fund's performance
would change for a change/movement in the benchmark. When someone looks at the beta of a
mutual fund, they are judging out the tendency of their investment's return to react to the ups and
downs to the benchmark. A lower beta along with indicating that the investment has been less
volatile than the benchmark, also implies that the fund takes on a lesser amount of risk with lower
potential return. Also, a higher beta infers a higher-risk investment with a greater return possibility.

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 Standard Deviation of Fund
Beta = ---------------------------------------------- x R-Square
Standard Deviation of Benchmark

E. Sharpe Ratio

It measures the performance of fund with respect to the risk taken by it. It can be defined as excess
return over risk-free rate divided by standard deviation of the fund. A higher Sharpe Ratio,
represents that the fund has performed better in proportion to the risk taken by the fund. If Sharpe
Ratio is negative it indicates that a risk-less asset would perform better than the security being
analyzed.

Portfolio Return – Risk Free Rate

Sharpe Ratio = -------------------------------------------------------
Standard Deviation of the Fund

F. Treynor’s Ratio

It is defined as excess return generated by a fund over and above the risk free return. A higher
Treynor Ratio, represents that the fund has performed better in proportion to the risk taken by the
fund.

Portfolio Return – Risk Free Rate

Treynor’s Ratio = ----------------------------------------------
Beta of the Fund

G. Jensen’s Alpha

It is used to measure risk-adjusted performance of a portfolio, to assist investors determine the

risk-reward profile of a mutual fund. It measures the difference between a fund's actual returns and
its expected performance, given its level of risk. If the alpha return is positive, it means the fund
has outperformed its benchmark index. Similarly, if the alpha return is negative, it means the fund
has underperformed its benchmark index.

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Jensen’s Alpha = (Portfolio Return) – (Risk free return + Funds beta * (Benchmark return- Risk
free return))

H. Sortino Ratio

It measures the performance of the investment relative to the downside deviation. A higher Sortino
ratio indicates that the investor is being rewarded for taking on additional risk. Similarly a negative
Sortino ratio may suggest that the investor is not being rewarded for the additional risk taken.

Actual or expected portfolio return – Risk-free rate

Sortino Ratio = -----------------------------------------------------------------
Standard deviation of the downside risk

I. Information Ratio

This ratio shows excess returns relative to its benchmark, as well as the consistency in generating
the excess returns. Tracking error is used to measure the consistency of generating excess returns.
A higher information ratio infers a better portfolio manager who's achieving a higher return in
excess of the benchmark, for the risk taken.

Portfolio Return – Benchmark Return

Information Ratio = -------------------------------------------------
Tracking error

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 7. Findings and Discussion

Fig I : Combined Average Returns and Standard Deviation

Nifty 50 has shown an average return of 6.73%, among the selected ETF schemes the highest
average return is given by Aditya Birla Sun Life Gold ETF which is 18% while the lowest average
return is given by SBI magnum at 17.30%. But we could notice that returns for all the schemes
ranged 17% to 18% with minor differences. Also, all the ETF schemes have beaten the market
with a very high margin.

Combined Average Returns and

Standard Deviation
24.00%

20.00%

16.00%

12.00%

8.00%

4.00%

0.00%
Aditya Birla HDFC Gold
NIFTY 50 Axis Gold ETF Sun Life Gold SBI-ETF Gold Exchange
ETF Traded Fund
Combined Average Returns 6.73% 17.30% 18.00% 17.91% 17.89%
Standard Deviation 20.46% 14.99% 15.15% 15.12% 15.10%

Nifty 50 has presented a standard deviation of 20.46% while among the selected ETF schemes
Aditya Birla Sun Life Gold ETF has the highest standard deviation of 15.15%, therefore, is the
most risky scheme. Axis Gold ETF has the lowest standard deviation of 14.99% and is the least
risky scheme among the selected ETF schemes. Even here we could notice that standard deviation
for all the schemes ranged 14.99% to 15.15% with minor differences, hence all the funds could be
concluded to be almost equally risky.

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Fig II : Beta

Beta
1.50
1.00
1.00

0.50

0.00

-0.50

-1.00 -0.8144 -0.7682 -0.7730 -0.7472

Aditya Birla HDFC Gold
NIFTY 50 Axis Gold ETF Sun Life Gold SBI-ETF Gold Exchange
ETF Traded Fund
Beta 1.00 -0.8144 -0.7682 -0.7730 -0.7472

The analysis shows that all the funds have beta less than 1 which implies that all the schemes
are less volatile than Nifty 50 and are in defensive relationship with market.

Table I : Sharpe Ratio for all the funds

Fund Sharpe Ratio Rank

Axis Gold ETF 1.4861 3
Aditya Birla Sun Life Gold ETF 1.5170 1
SBI-ETF Gold 1.5141 2
HDFC Gold Exchange Traded Fund 1.5141 2

As we know higher the Sharpe Ratio, the better the fund has performed in proportion to the risk
taken by it. If Sharpe Ratio is negative it suggests that a risk free asset would perform better than
the scheme.

The analysis reveals that Aditya Birla Sun Life Gold ETF has the highest Sharpe ratio of 1.5170
which means it gives highest excess return over the risk free rate of return to the investors among
the selected ETF schemes.

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Table II : Treynor Ratio for all the funds

Fund Treynor Ratio Rank

Axis Gold ETF -0.2736 1
Aditya Birla Sun Life Gold ETF -0.2991 3
SBI-ETF Gold -0.2961 2
HDFC Gold Exchange Traded Fund -0.3060 4

As we know higher the Treynor ratio, the better the performance of the portfolio under analysis.
A fund with a higher Treynor ratio implies that the schemes has a better risk adjusted return than
that of another schemes with a lower Treynor ratio.

Axis Gold ETF has the highest Treynor Ratio i.e., -0.2736 means it gives best risk adjusted return
while HDFC Gold Exchange Traded Fund has the lowest Treynor Ratio i.e., -0.3060 hence it is
the least performer and it has a lesser risk adjusted return than that of other ELF schemes.

Table III : Jensen Alpha for all the funds

Fund Jensen Alpha Rank

Axis Gold ETF 0.3182 3
Aditya Birla Sun Life Gold ETF 0.3197 1
SBI-ETF Gold 0.3194 2
HDFC Gold Exchange Traded Fund 0.3161 4

As we know a positive alpha means the fund has outperformed its benchmark index.
Correspondingly, a negative alpha would indicate an underperformance. Investors are often
suggested to choose schemes with high Jensen Alpha ratios.

Table III shows that Aditya Birla Sun Life Gold ETF has the highest Jensen alpha of 0.3197 and
HDFC Gold Exchange Traded Fund has the lowest Jensen alpha which is 0.3161. We could also
notice that all the selected schemes have a positive alpha which means all the selected schemes
provide excess return over the expected return.

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Table IV : Sortino Ratio for all the funds

Fund Sortino Ratio Rank

Axis Gold ETF 2.2968 4
Aditya Birla Sun Life Gold ETF 2.8390 1
SBI-ETF Gold 2.7790 2
HDFC Gold Exchange Traded Fund 2.7478 3

As we know a higher Sortino ratio is better than a lower one as it indicates that the portfolio is
operating efficiently by not taking on unnecessary risk that is not being rewarded in the form of
higher returns. A low Sortino ratio implies that the investor is not being rewarded for additional
risk taken.

Aditya Birla Sun Life Gold ETF has the highest Sortino ratio of 2.8390 while Axis Gold ETF has
the lowest Sortino ratio of 2.2968 which implies that if an investor chooses Aditya Birla Sun Life
Gold ETF then there is a low probability of large loss while if the investor chooses Axis Gold ETF
then there is a high probability of large loss.

Table V : Information Ratio for all the funds

Fund Information Ratio Rank

Axis Gold ETF 0.2738 4
Aditya Birla Sun Life Gold ETF 0.2873 2
SBI-ETF Gold 0.2857 3
HDFC Gold Exchange Traded Fund 0.2897 1

As we know a higher Information Ratio result implies a better portfolio manager who's achieving
a higher return in excess of the benchmark, given the risk taken.

As we can see HDFC Gold Exchange Traded Fund has the highest Information ratio of 0.2897
hence the fund manager of HDFC Gold Exchange Traded Fund performed best among all the
selected schemes. While the fund manager of Axis Gold ETF performed poorest among all the
selected schemes as it has lowest Information ratio of 0.2738.

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Fig III : Rankings for Financial ratios of all the funds

Rankings for Financial ratios of all the funds

4

3
Rank

0
Information
Sharpe Ratio Treynor ratio Jensen Alpha Sortino Ratio
Ratio
Axis Gold ETF 3 1 3 4 4
Aditya Birla Sun Life Gold ETF 1 3 1 1 2
SBI-ETF Gold 2 2 2 2 3
HDFC Gold Exchange Traded Fund 2 4 4 3 1

Fig III gives an overview of the rankings of all the funds with respect to Sharpe Ratio, Treynor
Ratio, Jensen Alpha, Sortino Ratio and Information Ratio. It shows that Aditya Birla Sun Life
Gold ETF has received most number of Rank 1 (Sharpe ratio, Jensen Alpha and Sortino Ratio).
Also on calculating the average of the ranks for all the schemes it was found that Aditya Birla Sun
Life Gold ETF has least average and should be chosen by investors among the lot of selected ETF
schemes.

8. Conclusion

The study has compared four Exchange Traded Funds (ETF mutual funds) with Nifty 50 as their
benchmark. There are a variety of Exchange Traded Funds available for investors who are
interested to just replicate the performance of the benchmark. This study used some basic Financial
ratios which any investor should look into before deciding which scheme to choose to perfectly
balance their risk taking ability with their expected returns. The performance of all the four mutual
fund schemes were evaluated by return and risk analysis, risk adjusted performance measures and
performance of fund manager. The performance of all the fund in terms of combined average
returns for five years show that all four funds have shown higher and superior returns compared
to Nifty 50. In terms of standard deviation, all selected schemes are less risky than the market. All
the schemes have beta less than one which implies that they were less risky than Nifty 50. All the
schemes have positive Sharpe ratio which indicates that the fund being analyzed has performed

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better than a risk free asset would perform. All the schemes have negative Treynor ratio which
indicates that all the schemes have performed worse than a risk free asset. If systematic risk is
considered then we could conclude that all the schemes has performed worse than a risk free asset
and if unsystematic risk is considered then we could conclude that all the schemes have performed
better than a risk free asset. All the schemes have outperformed Nifty 50 as all of them have
positive Jensen alpha. All the schemes have positive Sortino ratio hence we can conclude that the
investors of all the schemes are being rewarded for taking on additional risk. As all the Information
ratio values are close to each other we can interpret that all the portfolio managers have achieved
equal excess return to that of Nifty 50.

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