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BW Businessworld

'Low Liquidity Biggest Problem Of ETFs On Indian Bourses'

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The proliferation of actively-managed funds has made it difficult for investors to choose appropriate active investment strategies, according to John Davies, global head of exchange traded products at S&P Dow Jones Indices. “Overtime, investors will have to add passive investment strategies to their portfolios to stabilise returns,” says Davies.

Retail investments worth Rs 12,200 crore — roughly over 1.2 per cent of overall mutual fund assets — are managed through exchange traded funds in India; of this Rs 10,580 crore are invested in gold ETFs alone, as per data by Assocation of Mutual Funds in India.

John Davies noted that low liquidity has been the biggest problem faced by ETF listed in Indian exchanges. In terms of trading volumes, even the most popular ETFs have turned in just over 1 lakh units over the past few months.“The ETF industry will grow in India in the years to come. Investors will have to be taught about ETFs, before they become popular here,” Davies said in an interview to BW| Businessworld’s Shailesh Menon.

Edited Excerpts
Active investment strategies or passive strategies. Which one’s better?
One’s not better than the other. It’s mostly a question of harnessing the best of both strategies. On an average, most active fund managers fail to beat their respective benchmarks. Passive strategies mirror market movements; so if indices have gained over a period of time, ETFs tracking them would also have made money.

Are ETFs growing, considering the general aversion towards stock market-linked products?
ETFs have taken a lot of time to grow even in developed markets. ETFs in the US manage assets worth a trillion dollars — which is just about 9 per cent of the entire mutual fund industry; in Europe it’s just 3 per cent. ETFs will evolve over a period of time. To answer your question, ETFs are quite popular among investors in developed markets. Most active fund managers in developed markets have not been able to beat benchmarks over a period of time. Also, the massive increase in number of equity funds has made it difficult for investors to pick the right fund or fund manager. Lower fees is also prompting investors to shift to ETFs.

There’s a verbal loop going around that ETFs are causing (market) crashes around the world. ETF detractors were more vocal about this last year. What’s your comment on this?
ETFs cannot be blamed for the (market) crashes last year. Most ETFs are pretty clear about liquidity. The asset base of ETF pools, across the world, is so low that it, in itself, cannot cause a market crash.

You said ETFs are cheaper investment options. But in India, ETFs charge about 40 – bps as asset management fees. Is that really cheap?
At 40–70 bps, Indian ETFs are still expensive in real terms. But if you compare expense ratios of other domestic funds, ETFs are much cheaper. I agree, ETFs are much cheaper in developed markets. An S&P-500 Spyder ETF charges an expense ratio of just 9 bps. Expense ratios will come down as markets mature in India.

Some asset managers have launched weighted index ETFs in India. How do you see this variant of ETFs evolving?
Weighted indices are becoming popular among investors world-over. Product manufacturers, on their part, are launching funds with strategies and derivative overlays. This trend of mixing active and passive strategies will gain popularity in the years to come. Weighted index ETFs are efficient and can outperform broader indices overtime.