There is healthy demand among global investors for reliable and transparent indices and benchmarks to gauge sector-level and overall market performance. This demand coincides with investors seeking out cost-efficient investment strategies and shifting their asset allocations to lower-cost passive or index-based products, such as exchange-traded funds (ETFs), from actively managed funds.
In India alone, passive investment strategies have been steadily increasing, with ETF assets crossing the USD 20 billion mark as of September 2019. The Indian government has played a critical role in the growth of these passive strategies. For example, the Employee’s Provident Fund Organization’s (EPFO) equity ETF allocations and the Department of Investment and Public Asset Management’s (DIPAM) ETF usage in their disinvestment program have helped lead the way for growth in the Indian market.
Globally, the growing interest in passive strategies spans different asset classes, including equities, fixed income, and commodities. In addition to the cost effectiveness, investors tend to be attracted to passive strategies because of the performance records of vehicles such as ETFs, which by design closely mirror the risk/return profiles of their respective indices and benchmarks.
For nearly two decades, S&P Dow Jones Indices has been tracking the performance of actively managed funds against their benchmarks in key markets such as India. Although the results vary, certain trends emerge over time, such as actively managed funds underperforming their benchmarks over short-and long-term periods.
In India and globally, equity-focused strategies have historically been more popular among investors. In fact, global assets in equity ETFs account for USD 4 trillion of the total passive market segment, which was just above USD 5 trillion as of September 2019.
Today, we are seeing passive strategies extend beyond equities to offer investors the tools to measure different segments of the global fixed income market. The launch of India’s first bond ETF, for instance, reflects the demand for more diversified exposures to equity and fixed income markets.
Indeed, fixed income passive strategies were one of the high points of 2019, with roughly USD 1 trillion in assets invested in credit-focused passive vehicles, and many asset owners expect this number to grow in the years to come. The underlying principle that anchors fixed income passive strategies is similar to that of the more established equity-focused offerings, although instead of a basket of stocks, investors buy into a basket of fixed income securities.
As the potential risks and opportunities of fixed income investing generate more attention, so does the need for independent and reliable global indices and benchmarks that enable investors to effectively monitor the performance of different segments of the debt market in order to make informed decisions. Each credit segment, whether it be investment grade, high yield, money market, or sovereign and public finance debt, has its own unique risk/return characteristics.
Lastly, independence, transparency, and liquidity are crucial factors for fixed income passive strategies to gain momentum and build an investor base in India and globally. While we make no predictions surrounding asset growth, we believe that an ongoing commitment to investor education and awareness will be key to the increased adoption of passive fixed income strategies.
 Etfgi.com, September 2019.