Exchange traded funds (ETFs) are getting more popular with investors and financial advisors with every passing day in India. As of April 2022, ETFs in India manage Rs 4 trillion of assets. Over the last three years, the size of investor assets managed by ETFs has grown by over three-times, as investors are showing more interest in passively-managed schemes.
Last year, was a record year of index funds and ETF launches as mutual funds in India focused on international markets.
After launching ETFs offering international exposure to investors, now mutual funds have been launching ETFs that come with the addition of a specific investment theme.
Domestic mutual funds have filed for ETFs on a diverse and wide range of investment themes - semiconductor chips, electric vehicles, future of transportation, artificial intelligence, metaverse, cloud computing, clean energy, as well as blockchain technology.
To get a global perspective on India’s emerging ETF market, we spoke with Deborah Fuhr, founder of ETFGI, on the sidelines of Cafemutual Passives Conference 2022. ETFGI is a leading research and consulting firm, tracking the global ETF market, with a database that covers over 7,600 ETFs in different international markets. Edited excerpts:
You have closely tracked how ETFs have grown globally over the years. What kind of growth you envisage for ETFs in India?
It would be realistic to think that going forward ETFs in India can grow at an annualised rate of 21 percent. Lot of more asset management companies in India are getting involved with ETFs now. With larger number of firms talking about ETFs, there is more education and it gives a sense of comfort to investors to consider these products for their portfolios. As we see more firms entering the ETF market with their products and more advisors recommending it to their investors, it can have a snowball effect, making the ETF market bigger as it moves along.
When it comes to mid cap and small cap ETFs, what are the challenges you see in India?
When someone's building an ETF on small cap securities, one needs to be careful. And that's also the reason, the product manufacturers don't include all the securities in the underlying small cap index, so that the ETF portfolio is liquid enough to allow creation and redemption of units. So, the product manufacturers need to look at the liquidity of the basket of securities, and make sure that they are holding a basket that is liquid and tradeable.
There is a strong debate here in India on active vs passive funds. Large caps have not outperformed their benchmarks so much, but there is some outperformance still seen in mid and small cap funds. Your thoughts.
So, if investors can find an active manager that has been able to deliver alpha and feel comfortable putting money with, investors should do that then. If you look at the data for large caps, 86 percent of active funds in India have not beaten the benchmark. Even in mid and small caps, it is difficult to find funds that can beat the benchmark. And just because they do it in one year, it doesn’t mean they will do it over two-, three- or five-years. So, that’s the challenge.
But, I do understand that many investors want to invest in active funds and that is why it ends up being a combination of putting money into active strategies, where they feel they can generate outperformance and use some index funds or ETFs for other types of exposures.
What kind of parallels you see in India and global markets? Now, we have also sorts of passive funds coming in, whether it is do with electric vehicle, semi-conductors chips, artificial intelligence and the list goes onIndia is moving in a similar direction with its pace of launches. Globally as well, we have seen a record number of new launches in year-to-date. In Europe, we just had an ETF launched for pets as people are spending lot of time with dogs and cats during Covid-19 and looking after them. New ETF launches in India are also theme-based, in addition to international exposure. In US, we have an ETF that provides exposure to airlines, so there is the travel theme there. So, with ETFs, anything you come up with, can be turned into an investment theme. So, you need to have products that investors understand and can use, if it doesn’t relate with investors, they are not going to use it. So, it has to make sense in the portfolio and also make sense to the market. What has come to the Indian market, does make sense and we are seeing that evolution happening. Many of the Indian domestic asset management companies have relationships with global firms that have ETFs, so they can see some of the experience that is happening in US, Europe or Asian countries.