There is a healthy demand among global investors for reliable and transparent indices and benchmarks to gauge sector-level and market performance.
This demand coincides with investors seeking out cost-efficient investment strategies, and shifting their asset allocations to lower-cost passive or index-based products such as exchange-traded funds (ETFs) from actively managed funds.
In India alone, passive investment strategies are steadily increasing with ETF assets crossing the $20 billion mark as of September 2019.
The Indian government has played a critical role in its growth. For example, the Employees Provident Fund Organisation’s (EPFO) equity ETF allocations, and the Department of Investment and Public Asset Management’s (DIPAM) ETF usage in their disinvestment programme has helped lead the way for growth in the Indian market.
Globally, the growing interest in passive strategies cuts across different asset classes including stocks, bonds, and commodities.
In addition to the cost-savings, investors are generally attracted to passive strategies because of the performance records of vehicles such as ETFs, which by design closely mirror the risk and return profiles of their respective indices and benchmarks.
For nearly two decades, S&P Dow Jones Indices has been tracking the performance of actively managed funds against their benchmarks in key markets such as India.
The results are not always the same but certain trends emerge over time such as actively managed funds underperforming their indices over the short-and long-term.
In India and globally, equity-focused strategies have historically been more popular among investors. In fact, global assets in equity ETFs account for $4 trillion of the total passive market segment, which is just above $5 trillion as of September 2019.
Today, we are seeing passive strategies extending beyond stocks to offer investors with exposures to different segments of the global fixed-income market.
The launch of India’s first Bond ETF, for instance, reflects the demand for more diversified exposures on both the equity and debt side.
Indeed, fixed-income passive strategies have been one of the bright spots in 2019, with roughly $1 trillion in assets invested in credit-focused passive vehicles.
Asset owners expect this number to grow in the years to come. The underlying principle that anchors fixed-income passive strategies is similar to the more established equity-focused offerings. Instead of a basket of stocks, investors buy into a basket of fixed-income securities.
As the risks and opportunities around fixed-income investing generate more attention, so do the need for independent and reliable global indices and benchmarks.
We anticipate investors will utilize indices and benchmarks that will enable them to effectively monitor the performance of different segments of the credit market and make informed decisions.
Each credit segment, whether it be investment grade or high yield or money market or sovereign and public finance debt, has its own unique risk-return characteristics.
Lastly, independence, transparency, and liquidity are crucial factors for fixed-income passive strategies to gain momentum and build an investor base both in India and globally.
While we make no predictions of its asset growth, we believe that an ongoing commitment to investor education and awareness will be key to increased adoption.
(The author is Head – South Asia, S&P Dow Jones Indices)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.