A Growing ETF Market in India

A record-breaking collection on the Bharat 22 ETF (based on the S&P BSE Bharat 22 Index) earmarked a historical event for the Indian ETF market. The issue size pegged at to value INR 8,000 crores) received a nearly four-fold oversubscription, at over INR 31,000 crores.[1] This marked a huge success for the Indian government in its disinvestment program, and they decided to retain INR 14,500 crores and return the balance oversubscription.

The S&P BSE Bharat 22 Index is designed to measure the performance of 22 select companies disinvested by the central government of India. A well-balanced index, it cuts across six sectors, with a stock cap of 15% and a sector cap of 20%. The index was launched on Aug. 10, 2017, with a YTD return of 23.20% (as of Dec. 29, 2017).

Exhibit 1: S&P BSE Bharat 22 Index Returns 

INDEX NAME Returns (%)
3MTH            YTD
  Annualized Returns (%)
1 Year                  3 Year             5 Year              10 Year
S&P BSE Bharat 22 Index Total Return 8.44 23.20 23.20 9.85 13.69 8.98
S&P BSE Bharat 22 Index Price Return 8.30 20.26 20.26 7.40 11.07 6.70

Source: Asia Index Pvt. Ltd. Data as of Dec. 29, 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

The current exponential growth in the Indian ETF market is ushering in acceptance of the passive style of investing. However, it’s still in its nascent stages for this market compared with more developed markets such as the U.S. and Europe. As of Nov. 31, 2017, the global ETF market stood at over USD 4.7 trillion of assets under management, with 7,000 products across 70 exchanges. These statistics favor the U.S. and European markets, which constitute nearly 70% and 16% of the global ETF markets, respectively. The top three global ETF issuers are iShares, Vanguard, and State Street.

In India, the current statistics estimate assets of USD 8 billion, with 67 products[2] and a YTD growth of over 100%; assets were at USD 3 billion at the end of 2016. The growth can be mainly contributed to the inflows in the Bharat 22 ETF and the CPSE ETF, both of which are government initiatives. The growth in assets in the Nifty and SENSEX ETFs are also a result of the boost provided by the introduction of investments in ETFs by pension funds. We see that in India, the government is providing a major impetus to the growth of the ETF space, thereby promoting passive investment.

As always, the active and passive debate is an ongoing one. Since its launch in 2013, the SPIVA® India Scorecard has aimed to provide some statistical evidence to support the argument. The latest scorecard showcased that in the large-cap equity funds category, over 50% of active large-cap equity funds in India underperformed the S&P BSE 100 in the 1-, 5-, and 10-year periods ending June 2017. Over the three- and five-year periods ending June 2017, the majority of actively managed mid-/small-cap equity funds in India outperformed the S&P BSE MidCap. However, over the one-year period, 56.52% of those funds lagged the benchmark (for details, see the SPIVA India Mid-Year 2017 Scorecard).

Exhibit 2: Percentage of Funds Outperformed by the Index
Indian Equity Large-Cap S&P BSE 100 52.87 34.19 50.93 58.47
Indian ELSS S&P BSE 200 38.10 16.22 19.44 41.38
Indian Equity Mid-/Small-Cap S&P BSE MidCap 56.52 43.94 37.31 50.00
Indian Government Bond S&P BSE India Government Bond Index 37.21 64.81 75.47 93.33
Indian Composite Bond S&P BSE India Bond Index 73.83 93.65 96.91 90.70

Source: S&P Dow Jones Indices LLC, Morningstar, and Association of Mutual Funds in India. Data as of June 30, 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

Access to market beta and indexed returns is slowly gaining momentum. The benefits of index-based investing—low costs, diversification, flexibility, and access to a theme, sector, segment, or strategy via one vehicle—are making their way into the Indian market and its participants.

The hope is that as the space widens, its opens up more ideas and concepts to index-based investing. While we are still a while away from artificial intelligence ETFs, surely more advanced strategic indices such as factor indices can be adopted by market participants to explore the passive style!

[1]   Source: Times of India, Nov. 21, 2017.

[2]   As of Nov. 31, 2017.

The posts on this blog are opinions, not advice. Please read our disclaimers.

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