With assets surging, ETF is the next big story

The rise of Exchange traded funds (ETFs) appear to be the unfolding big investment story. With investors ploughing money into ETFs, the total asset under management has more than tripled from ₹4,283 crore in May 2012 to ₹14,008 crore by the end of May this year.

The ETF is finally coming onto its own in India. “Globally, it took over a decade for ETFs to take off and that could play out in India as well,” says Vikaas Sachdeva, CEO, Edelweiss Mutual Fund.

The first Indian ETF, Nifty BeES, was launched in January 2002. But the first decade for these funds was insipid.

“The inflexion point is just a couple of years away. It took 11 years for global ETFs to reach an asset size of $1 trillion, but it doubled in the next five years,” says Sachdeva.

Surprisingly, it is the non-Nifty ETFs that have led the growth over the past three years.

Growing investment demand for gold has made investors flock to gold ETFs. These are preferred over physical gold due to the ease of storage and higher liquidity.

Gold ETFs currently account for almost 48 per cent of all ETF assets.

The Centre’s decision to divest its stake in public sector enterprises led to a surge in the CPSE ETFs that have public sector enterprises as their underlying asset. This segment garnered ₹2,414 crore and accounts for a fifth of the total assets.

A surge in the demand for ETFs based on banking shares over the past year is the third reason for their surge. Goldman Sachs’ Bank BeES has seen assets increase from ₹143 crore in May 2014 to ₹1,434 crore by May 2015. Kotak Banking ETF has similarly garnered ₹566 crore over the past year.

The increased demand in banking ETFs is driven mainly by insurance companies, says Sachdeva.

“Buying a Nifty ETF can make insurance companies exceed the sector limits in some sectors. Buying bank ETF does not come with this risk.”

According to an NSE spokesperson, many brokers are encouraging investors to invest in ETFs through SIPs (systematic investment plans).

“People are willing to put money into the market as they do in a recurring deposit.” About 30,000 such accounts were set up in FY15.

While the growth in the last three years is heartening, the ETF segment in India lags far behind its developed market peers. The NYSE, for instance, has 1,470 ETFs listed on it. The Deutche Borse with 1,032 ETFs, SIX Swiss Exchange with 841 ETFs and Euronext with 618 ETFs are the other major exchanges that lead in ETF trading.

In contrast, the NSE has fewer than 50 ETFs listed on it.

In January 2015, the value of ETFs traded on the NYSE was $459 billion while $268 billion of ETFs were traded on the Nasdaq OMX, according to the World Federation of Exchanges. The ETF turnover of $184 million on the NSE indeed compares poorly. So what is impeding the growth of ETFs in India? “It is actually a broking product sold through a mutual fund channel,” explains Sachdeva. “Push from distributors is important to attract retail investors. Since ETF is a low-margin, high-volume business, the marketing push is taking time.”

Lack of options could be another factor. Compared to the Nifty ETFs, the CPSE, gold and bank ETFs are gaining traction.

This shows that investors are attracted to novel strategies. While the NSE has numerous thematic and strategic indices such as the CNX Dividend Opportunity Index, NSE quality index, CNX Consumption Index or CNX Service Sector Index, fund houses are yet to launch ETFs based on them.

The assets of these funds are also set to grow with the government allowing the EPFO (Employees’ Provident Fund Organisation) to invest up to 5 per cent of its incremental flows into equity through ETFs.