In October 2015, the global ETF industry witnessed its all-time high of the year, with over 6,000 ETFs and ETPs and assets reaching the USD 3 trillion mark. The year also saw month-over-month increases in inflows to ETFs, with record increases in assets across regions. Japan led in terms of year-to-date growth, with an increase of over 200%. However, in absolute terms, the leaders have been the usual: the U.S. and Europe. As per the latest numbers for the end of November, ETFs and ETPs have gathered over USD 300 billion in net new assets, which is a record in itself.
India has not been far behind in this year’s trend in ETFs. It indeed has been an interesting year for investors in India. Who would have imagined that India’s biggest pension fund would make a foray into equities, and using ETFs as the vehicle? Was this a positive move? It definitely seems that way! The impetus provided to the segment was tremendous and the Indian ETF industry, which had assets merely trickling in and was struggling to stay afloat, suddenly surfaced into the limelight.
At the end of March, the Indian Ministry of Labour gave notice of a new investment regulation for the Employees’ Provident Fund Organization (EPFO), which allowed investments of up to 5% of incremental income in ETFs. There was added flexibility for exempt PF trusts for which equity investment limits would be higher, and they could invest anywhere between 5%-15% of their funds in equity and equity-related instruments.
It was indeed a historic moment, and for the first time in its 64-year history, the EPFO announced its first ETF investments, in the S&P BSE SENSEX ETF and the Nifty ETF, in August 2015. This move brought some much-needed confidence in ETFs, whose advantages can include diversification, transparency, liquidity, and cost effectiveness.
The Indian ETF industry currently has 52 products with approximately USD 2 billion in assets. It is interesting to note that in 2005, there were just six ETF products, with assets not even adding up to USD 1 billion.
Exhibit 1: Global Assets in ETFs or ETPs
If we observe the growth of ETFs in global markets, we would see that a growth trend started in 2008, in which the number of ETFs and ETPs nearly tripled, from just over 2,000 ETFs in 2008 to over 6000 ETF and ETPs in November 2015, with assets increasing from over USD 700 billion to nearly USD 3 trillion in the same time period. While the first trillion took over a decade, the subsequent increase in assets has only taken a couple more years, which suggests a rate of exponential growth.
India seems to be on the brink of that rise, and with the new changes, positive sentiments, and the boost being provided to ETFs; we might be looking at a similar trend for the Indian markets.