Strong growth forecast for India's ETF industry

Just as China initially attracted far greater foreign direct investment than India, it is also home to a much more developed exchange-traded funds (ETF) industry. The seven largest ETFs in Asia are all listed in either Hong Kong or China.

India, meanwhile, is way behind. It boasts a fraction of the region’s trading volume, predominantly in ETFs that own gold. But industry players expect India’s range of ETFs to see strong growth over the next year to 18 months, with equity offerings starting to attract increasing volume.

“Over the last 12 months, equity ETFs [in India] have actually picked up and a lot more houses have started to launch them,” says Nitin Rakesh, managing director and CEO of Motilal Oswal Asset Management. “There is a wide open niche that we are trying to exploit. We are working on three or four products in the pipeline that will be launching before the end of March.”

In terms of market share in Asia’s ETF business, China dominates with 40% of total turnover, followed by Hong Kong with 33% and Japan with 12%, according to Deutsche Bank data.

India lags behind with a market share of just 0.2%. Although there is $3.4 billion worth of India-focused ETFs that are listed overseas, there’s little in the way of domestic business. “ETFs are an undeveloped industry in India still,” says Jim Shapiro, head of market development at the Bombay Stock Exchange, which issued a report in July on Indian ETFs. “Compared to the rest of the world, there are very few ETFs.”

But globally listed ETFs focused on India are likely to continue to prove popular with overseas investors, particularly since retail investors cannot access India’s markets directly if they are outside the country.

Lyxor has the most popular India listing, with $1.76 billion in assets, followed by Wisdom Tree, iShares, iPath, Deutsche Bank and Powershares products.

For India-listed ETFs, the major success story so far has been gold. In a country that is both the world’s largest importer and consumer of the precious metal, gold ETFs have caught on as a safe, simple way to gain exposure without any of the risks associated with storing gold at home – something millions of Indians do.

According to Shapiro, gold ETFs – the most popular being the Gold Bees product from Benchmark Mutual Fund – make up 57% of the domestic ETF market, which stands at $687 million in assets.

By contrast, Shapiro says that fewer than 1% of Indian households own equities of any sort. Trading in India’s markets is dominated by intra-day trading from retail investors, but he expects demand for equity-linked ETFs to grow as longer-term investors see the appeal.

“Only about 20% of the trading here settles every day,” Shapiro notes. “It’s a very retail market and very speculative.”

Asset managers are hopeful that they can attract fresh equity investment by rolling out stock-focused ETFs, something they have started to do over the last year. 

In July, Motilal Oswal Asset Management launched the MOSt Shares M50 ETF, which has rapidly become the second-largest equity ETF in India, with $69 million in assets and 20,000 investors. It ranks behind only the Nifty Bees ETF, with $94 million in assets.

Instead of being an index fund that purely reproduces the Nifty 50 index, it adds some variation, weighting the stocks by fundamentals rather than market capitalisation.

The company is also looking to introduce several ETFs during this financial fiscal year that track individual sectors or are devoted to specific classes of assets, such as large-, mid- or small-cap stocks.

“India has a long way to go before we are a mature, efficient market,” concedes Rakesh. “The growth will come not only from the existing Nifty-based products. We are taking the view that we should give people almost every product that can use ETFs.”