Dear All,
Please find below a good article as appeared in LiveMint on ETF in India for your reading:
Is the ETF wave coming to India?
Within the domestic mutual funds, the ETF space has been muted
Exchange-traded funds (ETFs)—a cross breed of open-end and closed-end mutual funds that trade on stock markets, usually linked to an underlying index—continue to be the fastest growing pooled portfolio of assets. Global assets under management (AUM) of ETFs have now crossed $2.5 trillion and are estimated to overtake the hedge fund industry assets in the next 12 months. Much of this growth is now getting fuelled by the Asia-Pacific region where ETFs are growing at a pace of 25-30% annually as compared with 15-20% in the developed markets.
Indian investors have largely ignored this huge ETF shift that has happened primarily because passive indexing as a strategy in India over longer period of times has underperformed a large part of the active fund managers. Apart from this, the implications of the lower cost of ETFs has not been completely demonstrated on the net returns. Consequently, though the first domestic ETF was launched as far back as in December 2001, by the erstwhile Benchmark Asset Management, the ETF category has not really changed investor preferences into a significant part of domestic investors’ portfolios.
On the other hand, India-dedicated global ETFs have shown remarkable growth, with AUMs more than doubling in the past 12 months. For instance, Wisdom Tree India Earnings ETF has seen its AUM growing from under $1 billion to over $2.25 billion as of October 2014. Compare this with other non-ETF global funds, such as Aberdeen Global Indian Equity Fund, that have seen a 25-30% rise in their AUMs in a similar period. Indian mutual funds, too, have seen a rise of 60-70% in their equity AUMs.
With the kind of interest and flows that India-dedicated ETFs are seeing, it is just a matter of time that these become a more significant segment in the Indian markets determining the future course, especially given their inherent nature of swift inflows and outflows.
The other trend that is shaping up is the emergence of India-dedicated ETFs beyond just equities and in other asset classes such as sovereign debt within the foreign institutional investors’ (FII) limits of $30 billion currently in place. With the Reserve Bank of India avowed to increasing these debt limits, this is another category that is seeing an increase in appetite among global investors for Indian assets. With this trend also developing, not only will the debt markets deepen further, but they may also increase the participation, and maybe volatility, if the debt markets in the coming years.
The ETF wave that is emerging among global investors for an increasing bite of Indian assets is gaining ground and could grow into becoming the most preferred vehicle for taking exposure to India.
Within the domestic mutual funds, the ETF space has been muted, save for occasional bursts of activity that happened in bank ETFs or specific ETFs, wherein there were limits on stock exposures taken by foreign institutional investors (FIIs), clearly signifying that these were used more as a quasi-vehicle by investors rather than as a core holding. In addition, there was very minimal participation from domestic investors.
The first significant change came about with gold ETFs. These introduced domestic investors to ETFs, but it was only when the overlaying gold feeder funds were launched that more interest was created. But the ETF idea did not really blossom even then.
The bigger change came in with the CPSE (Central Public Sector Enterprises) ETF, which was launched in March 2014. With the initial discount to retail investors offered during the initial offer, and the subsequent rally in the CPSE Index in particular and the market as a whole, retail investors were enthused to evaluate ETFs more closely and invest in them.
Another important development was that banks and financial institutions have participated significantly in the CPSE ETF as a core holding in their portfolios. This is evident from the fact that most of these institutions have held on to the ETF even after a significant rally in the ensuing months.
With the success, and also learnings, of the CPSE ETF, the government has now called bids for the launch of SUUTI (Specified Undertaking of Unit Trust of India) ETF, which has seen much more interest from Indian MFs, to take it to investor’s. This is in spite of the rigorous conditions in the bid document of having a minimum marketing budget, outside of upfront commissions, from the fund house to promote the ETF.
If we have another successful domestic ETF launch in the form of the SUUTI ETF, it could completely change the domestic appetite of ETFs, although some may argue that this will happen more among institutions. Given these two macro trends—global India-dedicated ETFs gaining significant share and the domestic appetite for ETFs on the verge of change— these funds may be on the verge of taking off here. Manoj Nagpal is chief executive officer, Outlook Asia Capital
Read more at: http://www.livemint.com/
Read more at: http://www.livemint.com/
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