Over the past two years, exchange-traded funds (ETFs) offering gold and silver have attracted significant attention from retail investors, emerging as a convenient route to gain exposure to precious metals. At the same time, ETFs that track major equity indices have also found a place in individual portfolios, as passive investing gathers pace in India. This shift is reflected in the sharp rise in passive mutual fund assets, which have grown more than five-fold from about ₹2.8 lakh crore in February 2021 to nearly ₹15 lakh crore by February 2026. The number of investor folios has also surged, reaching around 3.4 crore during the same period.

With the ETF universe expanding to 314 funds tracking 118 different indices, selecting the right ETF has become increasingly important, particularly for small investors. Here are key factors to keep in mind when choosing ETFs for your portfolio.

Liquidity

Unlike regular mutual funds, ETF units are bought and sold on the stock exchange. This means that when you place an order, there must be enough market participants willing to take the other side of the trade. If trading activity is thin, you may struggle to buy or sell units at a reasonable price.

For investors who trade ETFs through the exchange, the practical approach is to stick to funds that show consistent trading activity. ETFs that record transactions almost every day and maintain reasonable turnover tend to provide better price discovery and smoother execution.

Interestingly, the Nippon India Silver ETF has become one of the top traded securities on domestic exchanges. For instance, over the last three months, between December 27, 2025 and March 27, 2026, the average daily traded volume on the NSE in the Nippon India Silver ETF was ₹2,986 crore. This is higher than the trading volumes of top equity stocks such as Infosys and Reliance Industries, which saw average traded volumes of ₹1,638 crore and ₹2,064 crore respectively during the period. Other actively traded commodity ETFs include Nippon India ETF Gold BeES (average daily volume of ₹1,174 crore), Tata Silver ETF (₹796 crore) and ICICI Prudential Silver ETF (₹503 crore). On the equity side, the top traded ETFs include Nippon India ETF Nifty 50 BeES (₹280 crore), Nippon India ETF Nifty IT (₹77 crore) and Motilal Oswal Nifty India Defence ETF (₹44 crore).

Impact cost

Trading activity also affects another important metric known as impact cost. This refers to the hidden transaction cost that arises from the bid-ask spread in the market. When liquidity is limited, the gap between the price at which buyers are willing to purchase and sellers are willing to sell tends to widen. Consequently, investors may end up paying more than expected while buying, or receiving less than expected while selling.

Stock exchanges publish impact cost statistics for various securities. For instance, the mean impact cost for HDFC Bank and Infosys on the NSE as of March 2026 was 0.01 per cent and 0.02 per cent respectively. Among ETFs, the Nippon India Nifty 50 ETF had an impact cost of 0.02 per cent and the Nippon India Nifty Midcap 150 ETF had 0.03 per cent. Among commodity ETFs, Nippon India’s Gold and Silver ETFs recorded impact costs of 0.02 per cent and 0.06 per cent respectively. ETFs with impact costs around 0.10 per cent are typically considered more efficient to trade.

Premium and discount to NAV

Another feature unique to ETFs is that their market price can deviate from their intrinsic value during trading hours. Since ETF units trade on the exchange, their price may sometimes move above or below the indicative net asset value (iNAV). These deviations occur mainly when liquidity is limited or when market makers are not actively arbitraging the price difference.

The iNAV reflects the real-time value of the ETF’s underlying portfolio and is calculated by the exchange based on the market prices of the constituent securities.

If the ETF’s market price is higher than the iNAV, it is said to trade at a premium; if it is lower, it trades at a discount. Persistent premiums or discounts can increase the effective cost of investing. Therefore, ETFs in which market prices tend to stay close to their iNAV are generally preferable.

Recent instances in overseas ETFs illustrate the extent of the issue. As of March 27, 2026, six overseas ETFs, including Mirae Asset NYSE FANG+ ETF, Mirae Asset S&P 500 Top 50 ETF and Nippon India ETF Hang Seng BeES, were trading at premiums of 6–25 per cent to their closing NAV due to the absence of market making and higher investor interest.

Tracking error

Apart from these trading-related factors, investors should also examine how closely an ETF replicates its benchmark index. This is measured through tracking error, which captures the variation in the difference between the returns of the ETF and those of the index it seeks to follow. Ideally, this gap should be minimal. Tracking difference, another measure, simply shows the difference between the returns of the ETF and the index. These differences can arise due to factors such as expense ratio, cash holdings within the fund or delays in rebalancing the portfolio when the index composition changes.

ETFs with lower tracking error (calculated daily using the last three years’ data) include Mirae Asset Nifty Financial Services ETF (0.02 per cent), DSP Nifty Bank ETF (0.02 per cent), Nippon India ETF Nifty Bank BeES (0.02 per cent) and SBI Nifty 50 ETF (0.03 per cent).

Total Expense Ratio

Cost is another advantage that ETFs offer. Because they are passively managed, their expense ratios are far lower than those charged by actively-managed equity funds. For example, ETFs that track the Nifty 50 charge an average expense ratio of around 0.1 per cent as of February 2026. In comparison, actively-managed large-cap equity funds charge around 2 per cent under regular plans and about 0.9 per cent under direct plans. Even index funds tend to cost more, with expense ratios around 0.5 per cent for regular plans and 0.2 per cent for direct plans. A higher expense ratio in ETFs can add up over time and increase the total cost ownership, which may affect returns in the long run.

Published on March 28, 2026