While India has taken to passive investing in a big way, there are still a few hurdles preventing serious growth. We sat down with Tyler Carter, Associate Director, Global ETF Strategy at S&P DJI, to explore how passive’s rise in other markets could help inform a path forward in India.
1. How large is the passive market in India today and what has its growth trajectory looked like in recent years?
Tyler: The passive exchange-traded fund (ETF) market in India reached USD 25 billion in 2020. While this is modest compared with more established markets, the growth trajectory has picked up significantly in recent years; the 10-year CAGR sits at 49%, which is over twice the annual growth rate of the global ETF market overall. As we have seen in more developed markets, the ETF sponsors that establish a footprint early on tend to remain at the forefront as the market grows.
2. Some investors in India still prefer active management despite increased interest in and availability of passive strategies. What have been some of the influences of a shift to passive in other emerging markets?
Tyler: Passive is certainly making inroads. In just the past two years, passive ETFs have grown from 2% of the Indian mutual fund industry to over 9%. The driver of this appears to be the same driver that exists in other markets that have seen a similar shift: potential value. Passive investing has historically provided a cheaper alternative for gaining broad exposure to the markets than active management. Despite often lower costs, passive access to markets hasn’t necessarily come at the expense of returns. For example, our headline index in India, the S&P BSE 100, has outperformed over 82% of active funds over a five-year period. (Note, however, index performance is not the same as fund performance. Index performance does not account for management fees, transaction costs, or other expenses.) Typically, if investors start to see that type of outperformance, the shift to passive tends to occur naturally. Our biannual S&P Indices Versus Active Funds (SPIVA®) Scorecards show that, over the long-run, passive outperforms active. That evidence can be compelling for investors looking to limit costs while keeping long-term goals in reach.
3. Liquidity has been a big problem in India historically. Can you talk about the effectiveness of liquidity enhancement programs where secondary market transactions are persistently low? What have similar markets done to boost liquidity that we could also consider?
Tyler: ETF market makers exist to help create an efficient, liquid trading market. Liquidity enhancement programs exist globally and have historically proven effective in developing liquidity for new and lesser-known products. These programs are really only one piece of the liquidity puzzle though. Something as simple as analyst coverage and increased communication to the target investor base can usually go a long way in helping to build and sustain liquidity.