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If you had searched the three letter acronym ETF 21 years ago, if we assume that Google existed back then, you would have had zero hits. Roll the clock forward today, and you get over 14 million hits! Just as the internet itself as evolved into an all-encompassing behemoth, ETFs or exchange traded funds have experienced a similar journey.
An ETF is like a mutual fund that trades on an exchange. In its simplest form, an ETF is an investment fund that holds a basket of stocks or bonds and trades like a stock on a stock exchange, replicating an underlying index such as the S&P BSE Sensex. The first ETFs provided a way to buy and sell an investment fund that tracked an index.
The government of India is reducing its holding in 10 public sector undertakings (PSUs) by creating an ETF comprising the stocks of the companies. The ETF route could provide a cost effective way for the retail investors to own a part of the PSUs without having to own the company's stock and monitor the same like a professional investor.
The biggest advantage of ETFs is that they are also transparent, publishing their holdings daily, which means investors know what their positions are and because they trade on an exchange, investors can easily re-adjust their portfolios.
Furthermore, ETFs allow exposure to a variety of different asset classes, geographies, sectors and strategies in a more liquid and efficient manner. They also provide exposure to asset classes that are normally difficult to access, example commodities and private equity. ETFs act as a compliment to broader asset allocation strategies providing efficient tools for diversification.
From an Indian ETF perspective, we are entering the 13th year since the first ETF and there are now 39 ETFs, with 39 listings, assets of $2 billion from 15 providers on two exchanges. There is a growing desire to enhance the education and utilization of ETFs both within India for domestic investors and for international investors looking for Indian exposure. Historically, gold products have dominated the domestic ETF market, but the recent initiatives such as the PSU ETF, which is designed to provide investor access to state-owned companies, to the abolition of commissions to the insurance regulator (IRDA) recently allowing investment in ETFs, are all positive moves that potentially will provide the catalyst for increased uptake of equity ETFs.
The global ETF market has been a “20 year” overnight success, and so patience is the key. But coupled with these recent initiatives, there is hope for the Indian ETF market to grow.
This year sees the 21st anniversary of the launch of what is commonly accepted as the first ETF, SPY tracking the S&P 500 index, which is also the largest with assets under management at the end of 2012 of almost $175 billion.
The past 21 years have seen the ETF market grow in terms of assets, number of products, types of exposures and geographical presence. Since that time, ETFs have evolved into more sophisticated investments such as leveraged and inverse versions of the underlying index.
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