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BW Businessworld

Active Growth In A Passive Market

India outperformed the global market in ETF growth rate with a 44 per cent year-to-date (YTD) CAGR in comparison to global ETF market growth rate of 15 per cent YTD CAGR at the end of November 2016

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The investment landscape is constantly shifting and one of the prominent changes we have witnessed over the last few years has been the growth of passive investing.

The global markets have had a head start, but the Indian passive investing space seems to have grown faster than expected. A major recent catalyst for this change has been the support provided by government initiatives such as the Central Public Sector Enterprises’ (CPSE) exchange traded fund (ETF) and the Employees’ Provident Fund Organisation’s (EPFO) decision to invest in ETFs. The global ETF markets have displayed a year-on-year ascending growth in assets and number of ETFs with a record high of over $3,445-billion assets under management and over 6,605 ETF/ETPs across the globe. The Indian ETF assets under management grew to an aggregate $3 billion with 66 products at the end of November 2016. Confirming its accelerated growth in this segment, India outperformed the global market in ETF growth rate with a 44 per cent year-to-date (YTD) CAGR in comparison to global ETF market growth rate of 15 per cent YTD CAGR at the end of November 2016.

As markets are warming up to the passive play, the need for multiple options are growing, and investors are looking beyond market-linked returns to options that offer returns based on factor filters. The global markets’ and investors’ inclination to such products are resulting in their growing demand and popularity. While one would think that it would take a while for such concepts to gain traction in India, many local product providers are looking at factor-based investment options — confirming that India is playing catch up with global trends.

In spite of this, if we look at the growing Indian passive market more holistically, it is still in its infancy and there is need for development both in product infrastructure and ETF literacy. Investor awareness and education programmes are required to build deeper understanding, through various channels such as thought leadership events, educative blogs and webinars and microsites.

New Themes for Index Providers in 2017
The popularity of smart beta or factor-based indices is on the rise. Smart beta or factor-based index products are based on rules and factors that blend active strategies in a passive portfolio thereby providing the benefit of transparency along with cost reduction. This, in turn, provides alternative returns as compared to traditional market beta products.

In continuation of this interest, 2017 should see growth in these products both locally and globally. Another major development in India this year is the upcoming launch of the second CPSE ETF. This will be a further booster to this passive space and aid market growth.

As the optimism around passive market grows, there could be a shift from traditional market-based ETFs on indices like the S&P BSE Sensex to factor-based ones like the S&P BSE Low Volatility Index. The only thing that remains constant is change, and we look forward to monitoring and participating in the developments of the ETF market and the growth of index-based products in India this year.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Koel Ghosh

The author is Business Head, Asia Index (a joint-venture between S&P Dow Jones Indices and BSE)

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