Indian ETF market doubles in three years to $4 billion

India has the world’s second-fastest growing exchange traded funds market, behind only Japan, with assets doubling to $4 billion in three years

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

Mumbai: India has the world’s second-fastest growing exchange traded funds (ETF) market, behind only Japan, with assets more than doubling to $4 billion from $1.9 billion in the past three years, a Bloomberg Intelligence report said.

“While that’s mostly due to greater adoption of ETFs to gain low-cost market exposure, about a third of the boost came via the Reliance Mutual Fund’s CPSE ETF,” the report added.

The CPSE ETF was launched by Goldman Sachs Asset Management India on 18 March 2014, and comprises 10 stocks, which are majority-owned by the Indian government: Oil and Natural Gas Corp. Ltd, GAIL (India) Ltd, Coal India Ltd, Rural Electrification Corp. Ltd, Oil India Ltd, Indian Oil Corp. Ltd, Power Finance Corp. Ltd, Container Corp. of India Ltd, Bharat Electronics Ltd and Engineers India Ltd.

Currently, Reliance Mutual Fund manages the CPSE ETF after Goldman Sachs exited the mutual fund business in India.

The ETF was tailor-made for the government to sell its stake in certain companies and has gained 47% in the past year.

This of course, was led by strong gains in stocks of state-run companies. National Stock Exchange’s PSU index has gained 44.6% in the last one year, while benchmark 50-share Nifty added 19.5%.

The CPSE ETF has outperformed the Nifty because 66% of its assets are in energy companies, which have surged with a rebound in oil prices. Brent crude has rallied 21.7% over the past one year.

Also, with institutions such as Employees’ Provident Fund Organization (EPFO) committing huge investments into this fund, hopes are high that the government may prompt state-run agencies and companies to invest in it.

“ETFs have benefited as a preferred vehicle for divestment purposes. The CPSE ETFs have helped grow the assets invested in ETFs in India,” said Deborah Fuhr, managing partner of ETFGI LLP, a research and consultancy firm on global ETF trends.

“This is likely to continue,” said Fuhr, adding education is key to investors understanding when and how to use ETFs.

Individual investors can invest a minimum of Rs5,000 in the CPSE ETF, while the maximum is Rs10 lakh. Non-institutional investors and qualified institutional buyers can invest a minimum amount of Rs10 lakh.

India and Japan are the two countries using the flexible ETF structure to help achieve their economic goals, in very different ways though, the Bloomberg Intelligence report said, adding they are the only two countries with ETF growth of more than 100% over the last three years.

Bank of Japan buys ETFs, including custom-made products that are focused on companies and their levels of capital spending as a way to stimulate a struggling economy.

However, the Indian ETF industry is still at a nascent stage, and the offerings have been limited.

“The CPSE ETFs are not typical in developed markets. ETFs are being embraced as tools to assist with short-term, tactical and long-term strategic investments by institutional investors, financial advisers and many retail investors in developed markets,” said Fuhr of ETFGI.

“In developed markets, the ETF offering is much broader and investors have the freedom to decide how much to invest in their home market, in international markets and in various asset classes,” added Fuhr.

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