ETFs in India: Detailed Overview and Future Outlook
ETFs are one of the most widely used investment options in the world. And due to their multiple benefits, ETFs are also becoming the preferred choice of many investors in India. So, let’s look into the history of the ETF industry in India and how the future is looking for this industry.
ETFs in India: The Past and Present
India has an interesting history in the case of ETFs. ETFs have been around for more than 15 years. The AUM of ETFs is increasing consistently, but they have gained massive popularity in recent years. Below is a chart showing the growth of AUM and a number of schemes in India.
As you can see, the number of ETFs has almost doubled in the past 5 years, and the AUM has almost doubled in the past 3 years.
The share of ETFs in the total AUM of the mutual fund industry has grown from 11.2% in February 2022 to 13.2% in February 2023. This shows that there is a rapid increase in ETF popularity.
But the ETF story in India is still at a very nascent stage. And due to this, there are a couple of issues investors face while investing in ETFs.
Current Issues in ETF Investing
Lack of Liquidity:
Liquidity in most ETFs remains a concern. For instance, the daily traded value of Nifty BeES (India’s most liquid ETF) is just 4%–6% of the daily traded value of Reliance Industries stock. In contrast, the most traded US ETF, the SPDR S&P 500 (SPY) ETF, has 3–4 times the daily trading volume of Apple Inc.
Lack of Coverage:
The coverage is also limited. There is only one ETF option (HDFC NIFTY Smallcap 250 ETF) to track small-cap stocks. Options for tracking sectoral indices are limited to 1–2 ETFs. Options for smart-beta, foreign equity, and debt ETFs are also limited. In essence, barring the major benchmark indices, major sectoral indices (Bank and IT), and gold, you have very limited options.
ETFs in India: Future Outlook
Despite the current issues discussed above, the ETF industry is growing rapidly. ETFs are great investment vehicles with multiple benefits. Our regulator (the SEBI) also feels the same, and it is trying to encourage ETF adoption in our country.
SEBI, in its latest circular titled Development of Passive Funds, has announced several measures to boost the passive ecosystem. These measures focus on increasing the secondary market liquidity of ETFs and giving a boost to the debt ETF space.
At the same time, we are witnessing a structural shift in the saving and investment patterns of Indians. As more Indians start investing in capital markets, the overall impact will lift all the boats including ETFs.
There are many other factors that are moving in the right direction – reduced transaction costs, better incentives for the market makers, and more demand for exotic ETF products.
The stars are aligned for an ETF revolution in India. As we keep saying, this is just the beginning of the ETF revolution in India!
FAQs
Is ETF a good investment vehicle?
Yes, ETFs are a great investment vehicle with multiple benefits. The primary benefits of ETFs include greater diversification, lower cost, and higher flexibility (in buying and selling).
What are the risks associated with ETFs?
As ETFs are tradable instruments that track financial assets with various risk profiles, they also carry different kinds of risks. This includes market risk, tracking error, liquidity risk, operational risk, etc.