5 mins read . 24 Nov 2022
The NSE recently celebrated the listing of its 150th ETF (exchange traded fund). What started off as a passive investment strategy back in 2002, has now grown to become a full-fledged asset class. Exchange traded funds (ETFs) are listed products on an underlying asset. The ETF manager just tries to mirror the underlying index or asset and the attempt is to reduce the tracking error to the extent possible.
In India, exchange traded funds (ETFs) are benchmarked on various assets like equity indices, bond indices, gold, silver etc. Typically, ETFs are low cost investment products, which are essentially closed ended. ETFs are listed on the stock exchange; so the ETF units can be bought and sold on the stock exchange like any other security. More importantly, you can buy or sell such ETF units using your existing trading account while the delivery of ETF units can be taken into the demat account.
What began with just 1 ETF benchmarked to the Nifty in 2002 has grown to 150 listed ETFs today on the NSE. Out of the 150 ETFs launched in the last 20 years, 41 ETFs were launched in the last 1 year, showing how back-loaded the growth has been. In the last few years, there has been a sharp growth in the ETF AUM as well as the ETF trading on the stock exchanges. The ETF AUM stood at Rs65,124 crore in October 2017. In the last 5 years the ETF AUM has grown 7.7 times to Rs502,000 crore in October 2022. Between FY14 and FY22, average daily turnover (ADTO) of ETFs on NSE grew 10-fold from Rs46 crore to Rs471 crore.
A number of factors were responsible for this growth of ETFs in last one year.
Firstly, low costs are a major attraction. A typical ETF has an expense ratio of less than 25-30 basis points. In comparison, if you go for an active equity fund, the expense ratio would range between 2% and 2.5% on an average. The lower expense ratio makes the ETF yields very competitive.
The trend globally is that active fund managers are finding it tougher to beat the index and that trend is catching on in India too. An index like the Sensex has given over 16.5% CAGR returns over the last 40 years. Surely, there is a lot of merit in an index ETF.
ETFs give a really wide choice to the investor at a very low cost. For instance, there are ETFs on equity indices, bond indices, global indices, gold, silver etc. Many of the exotic ETFs are yet to be permitted in India, and when that happens, sky is the limit.
A big boost to ETFs in India has come from the government. For instance, the EPFO has been permitted to invest in equities up to a threshold, but only via equity fund ETFs. Similarly, the government has been heavily relying on ETFs to fund its disinvestment program of public sector undertakings. These factors have given a boost to ETFs in India.
Passive investing is a trend that is catching on globally, and India is no exception. That puts ETFs in a sweet spot. With SEBI asking AMCs to appoint market makers for ETFs, one can look forward to greater liquidity. That is often a self-fulfilling prophecy. For now, the ETF action in India may have just begun.