India's ETFs Sector Sets Hot Growth Pace; Early Retail Adoption

Tom Burroughes

28 April 2020

India’s exchange traded funds market may well be dented by the global pandemic but ETFs certainly set the hottest pace for assets growth in recent years when compared with actively managed funds, figures show.

As of December 2019, the three-year compound annual growth rate for ETFs in India was 74.8 per cent. This is about five times the three-year CAGR of mutual funds of 15.3 per cent. Moreover, net new flows into ETFs have experienced a 59.8 per cent year-on-year increase from 2018, figures from , the research and analytics firm said in a report.

India’s regulator and government have been the largest drivers of growth since the beginning. The biggest participant in India’s ETF market is the Employees Provident Fund Organisation, which has allocated 15 per cent of its investable assets to ETFs, the report said.

Regulatory measures such as the categorisation of mutual fund products, focus on digital channels, and adoption of a trailer-fee based model have provided the impetus for the leap towards so-called “passive” vehicles such as ETFs.

Cerulli said managers’ difficult battle to achieve market-beating “Alpha” via mutual fund products amid the volatile stock markets have led them towards structures such as ETFs and index funds.

Even so, retail demand for ETFs is at an early stage, because advisors earn low commissions from distributing these funds, blunting the incentive to vigorously market them, the report said.

The number of ETFs in the market stands at 85, compared with 61 in 2018 and 36 in 2015.

The decade until the end of 2019 has been a strong one for the ETF sector globally. Regulatory reforms to financial advice in several regions, as well as investor disenchantment at the fees and performance of most actively managed funds, have combined to boost the ETF sector. Clearly, the sharp falls in equities since February due to the global COVID-19 pandemic are likely to hit AuM in total. According to ETFGI, a firm tracking the sector, assets invested in the global ETP/exchange traded product sector fell by 11.1 per cent from the figure at the end of March, standing at $5.37 trillion. (ETFs are typically open-ended, index-based funds, with active ETFs accounting for 1.1 per cent of the market share. ETPs, on the other hand, are similar to ETFs in the way that they trade and settle, but do not use an open-end fund structure.)