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The Indian ETF market continues to grow

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On the back of the recent news that ETF developer, ZyFin Holdings, is set to launch the world’s first Indian fixed income ETF, comes an overview of the ETF industry in India from Utkarsh Agrawal, Senior Analyst, Research & Design, S&P BSE Indices.

 ETFs offer diversification, Agrawal argues, and in India in recent years the number of ETFs offered and assets under management have increased, except for gold ETFs, as investors seek that diversification. He writes that in India the first ETF was listed in the year 2002, and since then the numbers have increased, up to 49 as of June 30, 2015 and represent four different asset classes, principally focussing on equities and commodities. Agrawal reports that the equity ETFs are primarily large cap with some focusing on mid cap and financial sectors. The entire commodity ETFs sector is based on gold.

“From Q2 2006 through Q4 2007, the quarterly asset under management in the equity ETFs soared and reached INR73.83 billion in Q4 2007. Since then it declined during the recession and reached the lowest at INR4.01 billion in Q2 2009. The asset under the management again started picking up since Q2 2014. This can be attributed to the improved market conditions as well as the introduction of the CPSE ETF which comprises almost 36 per cent of the assets within the equity ETFs as on June 30, 2015,” Agrawal writes.

Gold has traditionally been one of the most popular investment options in India and from Q2 2009 onwards, gold ETFs have had the highest share of the quarterly average assets reaching INR118.52 billion in Q1 2013. However, since Q2 2013, assets under management in gold ETFs have declined by more than half, due, Agrawal writes, to various reasons such as strengthening of dollar, and a lower demand for gold in the domestic market due to import restrictions, amongst others.

There is only one fixed income ETF focusing on ten year Indian government bonds, the new ZyFin product named above, and one liquid ETF, which is a money market ETF launched in 2003.

Turning to the liquidity profiles of the Indian ETFs, Agrawal writes: “Historically the gold ETFs combined have remained most liquid followed by the money market ETF. But in more recent times, the money market ETF has been the most liquid ETF and equity ETFs combined have been the second most liquid ETFs. During 2011 through 2012, gold ETFs were aggressively pursued by the investors. In Q3 2011, the combined quarterly average daily value traded of the gold ETFs was more than INR800 million. Since Q2 2013, the liquidity has reduced which is also augmented by the fact that the asset under the management have declined since then.”

India has only passive ETFs, but has seen dynamic growth in the sector over the years. “Indices play a major role in the functioning of the passive ETFs which simply try to mirror the benchmark index they are based on. With more and more investors becoming aware of the potential advantages of this investment product, it will continue to grow and help investors in their quest for diversification with lesser cost and tax efficiency,” Agrawal concludes.

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