ABSTRACT
Exchange Traded Funds (ETFs) have grown tremendously in recent times, although they have been in India for over sixteen years now, with the first ETF, Nifty BEes listed in 2002. As the ETFs are issued to follow the prices of their underlying assets, their price movements are expected to track those of the underlying index or other assets they represent. Using the latest data from NSE, this paper evaluates the relationship between prices of ETFs in India and those of their underlying assets of the previous two years using the econometric techniques of Vector Autoregression. The study also focuses on understanding tracking error across the cross-section of ETF’s present in the Indian Markets. The key findings of the study are a lag of two days between the price change in index and ETFs. Further, the tracking error is significantly decreased when the number of days for rolling standard deviation are increased.
