The Indian ETF Saga – A promising story still in its initial chapters

The Genesis: Unveiling the Origin

The beginning of this year 2024 marks the 22nd anniversary for the Indian ETF industry. The listing of the first ETF, Nifty Bees in 2001 introduced India to exchange traded funds. The industry has come a long way since with 190 products and INR6.5lakh crores in assets under management (approx.USD78 billion).*

The industry had very humble beginnings as India is popularly biased towards active investing. This new financial investment vehicle that replicated the index to provide index-based returns was a new concept for the market and its players. An understanding for the scope and opportunity of this instrument was missing which came with the launch of the Central Public Sector Enterprises exchange-traded fund (CPSE ETF), an investment avenue that would allow investors to invest in a basket of those public sector companies. The CPSE ETF was the first of the many catalysts that accelerated the growth for Indian ETF industry. Launched in March 2014, followed by successive tranches, this ETF brought about awareness and interest to ETFs.

This was followed by the Employees’ Provident Fund Organisation (EPFO)beginning their ETF exposure in the Nifty and SENSEX ETFs in August 2015 with an initial allocation of 5% which over time has been extended to up to 15%. The total investments done by the EPFO has aggregated to approx. Rs 2.55 lakh crore between 2016-17 and October 31, 2023. It had invested Rs 14,983 crore in ETFs in 2016-17, Rs 24,790 crore in 2017-18, Rs 27,974 crore in 2018-19, Rs 31,501 crore in 2019-20, Rs 32,071 in 2020-21 and Rs 53,081 in 2022-23. As per an official statement, 8.7% of total EPFO investment corpus is with ETFs as of March 2022.

The successive accelerants included the Bharat 22 ETF launched in November 2017 as a tool for the Government to achieve its disinvestment target for the year giving investors access to key Central Public Sector Enterprises (CPSEs), Public Sector Undertakings (PSUs), Public Sector Banks (PSBs) and companies with stakes held under SUUTI (Specified Undertaking of the Unit Trust of India). The next government initiative supporting the ETF industry was the Bharat Bond ETF that provided investors with access to AAA rated bonds of public sector companies and the funds raised therein would be undertaken for capital expenditures by CPSEs. Listed in 2019 there were successive tranches that received good response. What this support did is induct many institutional and retail investors into the experience of ETFs as an investment avenue. The advantages of low cost, diversification liquidity, flexibility and transparency- all in one financial instrument -added to the benefits that made this option increasingly popular.

The Global Overview

The global ETF industry that is currently standing at a new landmark of USD 11.63 trillion at the end of December 2023# made its beginning way back in 1990 in with the Toronto 35 Index Participation Units which tracked TSE, Canada’s major index. 1993 witnessed the first USA ETF, the S&P 500 ETF Trust (SPDR)

At $11.63 trillion, the global ETF assets have surged by 25.6% in 2023, from $9.26 trillion at end of 2022. The geographical demographics for the larger share of assets continue to tilt towards the Americas, while EMEA and APAC regions are slowly but steadily growing in this space as well. In the asset class preferences, equity does take the lead, but fixed income had been gaining ground and interest. The SPDR S&P 500 ETF Trust continues to lead in terms of assets with $493billion as on December 2023#.

The year 2023 was a record year for ETF launches with over 500 new ETFs. The options are growing but the assets are growing among the top few popular ETFs many of which are broad market index based like the S&P 500, MSCI Emerging markets, FTSE Developed markets and so on. Higher yields have contributed to the

interest in bond ETFs and thereby its growth. Innovations and new concepts are making their way in with the latest development of the U.S. securities regulator approving U.S.-listed ETFs to track bitcoin. This has led to significant inflows into this newly approved category.

Reaching the first trillion

The exponential growth of the Indian ETF industry saw its first spur in 2019 where assets jumped from $9billion to $25billion. There has been no turning back since and the markets have matured to understand the proposition. While product providers, index providers and matured investors were embracing the potential of this new opportunity, there was still a mass majority that were completely clueless on the scope of this investment instrument.

The year 2023 has witnessed ETF asset growth such that reaching the first $100 billion is within arm’s reach. While assets are skewed in favour of market beta products favouring the Nifty and SENSEX, sector based ETF especially Bank ETFs rank next. The Indian ETF markets have opened up to new concepts beyond the basics as smart beta ETFs with low volatility, momentum, quality and value are gaining interest and assets. However, it’s a long road ahead as the active bias has a strong foothold. With 8crore stock market users only 3.5 crores are mutual fund users. With over 13crore demat account holders a dismal number are ETF holders as well. This offers a huge opportunity for those having access to demat to experience the benefits of ETF investing.

The never ending debate

The active versus passive debate has been a long and continuous one. For a country such as India the realisation that not only large cap segment but midcap a well is underperforming the benchmark indices in the long term is sinking in. However, it never needed to be an active OR passive conversation as the core satellite strategy can embrace both. That revelation has also led to many portfolios using both styles to meet investment goals.

New developments that India is yet to embrace

As Indian ETF industry is gearing up for growth, the global markets hold cues to the direction it may take. ESG is a popular theme that is being incorporated in many investment portfolios as sustainability and net zero goals are being sought to be achieved. While Bitcoin ETFs may take a while another trend in global markets has been the growth of actively managed ETFs. This rise has been unexpected with assets tripling in October 2023 to $444billion compared with October 2020. The growth rate was as high as 14% in the first half of the year 2023^. In a country which favours active investing, this could be the next development for an evolving industry.

A promising future

The global markets and the growth in the ETF space are a testament to an industry that is unstoppable. India is a rapidly expanding nation, with economic growth estimates surpassing 6%. The Indian ETF industry has grown to a sizeable 17% of the total Indian mutual fund industry.* As markets, players and investors evolve, the next growth trajectory will be colossal.

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Koel Ghosh is currently Head Strategic Initiatives, ETF Junction, India’s 1st dedicated platform for local and global ETFs aimed at encouraging ETFs in every investor’s portfolio. In her previous role, she led the regional and commercial efforts as Head South Asia, S&P Dow Jones Indices along with driving growth for Asia Index Private Limited the joint venture index business with BSE as Managing Director and Chief Executive Officer.

An advocate for passives, she is aiding the growth of passive investing in India by continuous education and thereby revolutionizing investment practices. Her extensive experience in the financial sector with a focus in the asset management space includes her roles in leading financial firms like Thompson Reuters, UTI Asset Management and IL&FS Asset Management Limited.

A Chartered Accountant by profession, she was recognised by AIWMI as one of the top 100 women in finance in India in 2019.

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