But retail investment remains low in this product compared with other mutual fund products, which is slowing its growth.
Total ETF asset under management stood at Rs 2.07 lakh crore as of August end, and nearly half of that was concentrated on ETFs based on the Nifty50. AUM in Nifty50 ETFs now stands at Rs 1.02 lakh record, a record high.
“The first ETF product was launched in December 2001, but fund flow of the ETF industry was very low till August 2015. The effective growth in Nifty50 AUM and that of the industry has happened only in last five years,” said Mukesh Agarwal, CEO, NSE Indices.
ETFs are investment tools that track benchmark indices, which means their returns are closely aligned to market returns – enough to beat most mutual fund schemes, data suggests.
Moreover, they are relatively low cost, with expense ratio as low as 0.05 per cent, which is why this is product recommended widely by the likes of Warren Buffet and John Bogle.
Amfi data showed domestic ETF AUM linked to equity and debt has grown at a solid rate of 65 per cent per annum over last 10 years. This financial year, ETF AUM has increased by more than Rs 60,000 crore even amid pandemic disruption. However, a part of it could be due to mark-to-market gains.
Agarwal said the trigger point for exponential growth in ETFs came after the government-run employee provident fund organisation started investing in equities via the ETF route since August 2015.
“Of late, increasing awareness about the product has also contributed to their rapid growth. A lot of people have started talking about its benefits, which has led to increase in demand and trading volume,” he said.
As many as 17 asset management companies have launched ETFs based on Nifty50 till now, and they command 49 per cent market share. Agarwal said there are 11 ETFs linked to Nifty50 outside India as well, with investments worth around $1 billion.
Nifty50’s main rival, BSE Sensex has nine products based on it, with AUM at Rs 41,276 crore, according to a BSE spokesperson. The AUM of Sensex ETF has grown 50 per cent from Rs 27,556 crore in March 2020.
Icra data showed NSE Indices have a 77 per cent market share of ETF market, while Asia Index Private Limited, which manages BSE indices, holds 22 per cent. In the debt ETF segment, NSE indices enjoy a virtual monopoly, thanks to Bharat Bond ETFs that have got huge inflows.
“Bharat Bond ETF has also contributed heavily to industry’s growth. In last 10 months since its launch, AUM of this product has crossed Rs 25,500 crore,” claimed Agarwal.
Agarwal said the claim that ETFs are picked only by institutional funds, like pension funds, is not true and retail investors too have contributed to the growth, especially in recent months.
“If only the institutional investors were investing in ETFs, then their weightage in AUM should have increased. But it has remained around 91-92 per cent and retail investors account for 7-9 per cent, which means the latter have equally participated in the growth journey,” he said.
Data shows ETFs account for 25 lakh folios, out of which over 13 lakh have been opened in last one year. “Individual investors account for 98 per cent of these folios. Our data shows retail investors also account for a good percentage of trading volume. In the pandemic period, 6 lakh new folios got created for ETFs during April-August 2020, mostly from retail and HNI investors,” he said.
Yet, penetration of ETFs among retail investors still remains low. For example, 88 per cent of equity fund AUM is contributed by individual investors (retail + HNI), but in the case of ETFs, it is only 8 per cent. Moreover, just 1 per cent of retail mutual fund investors’ money is in ETFs.
“Industry growth will continue and Nifty will continue to be their preferred choice. The next goal is to bring in more retail investors. Institutional investors will remain there, but stakeholders are creating awareness which will bring in more retail investors,” Agarwal said.
The industry is doing TV promotions during the ongoing Indian Premier League (IPL) to draw in more retail investors.
Few takers for strategic indices
NSE Indices has a suite of strategic indices or smart beta, but lack of awareness and low availability of products has kept investors away from them. Globally, the size of the ETF industry is around $7 trillion, out of which smart beta indices contribute 0.8 trillion or 11 per cent, Agarwal said.
In comparison, in India it is barely a few hundred crores — a fraction of a per cent of the total AUM of the ETF industry.
“Products are available in strategic indices and growth will happen. Recently, we launched Nifty 200 Momentum 30 Index and Nifty100 ESG Sector Leader Index on which AMCs are looking to launch ETFs,” Agarwal said.
“We are trying to create more indices that can be good strategies to invest in. After Bharat Bond ETF, a lot of people have started talking to us about launching debt ETFs, as they are highly suitable for Indian investors who look for predictability,” he said.
The launch of new indices can fuel growth of industry. “We believe in product innovation and we will continue to launch new indices, including debt indices, on which ETFs can be launched and will offer a variety of investment products to investors,” Agarwal said.