GROWTH OF ETF
IN INDIA & USA
SHANMUGA PRIYA S1 & CHRISTINA SUBIKSHA W2
119MBA0064 & 219MBA0007
VIT BUSINESS SCHOOL, VIT UNIVERSITY, VELLORE,
TN
ABSTRACT
The
Exchange-Traded Funds (ETF) is a type of fund, which represents a collection of
stocks, bonds or commodities, traded in an exchange. The market for ETF has
developed a great deal since it was first introduced. The primary reason being,
it provides an exposure towards a basket of securities, which typically tracks
an index. The index can be related to stock or commodity or bond. As the ETF
provides exposure to a basket of securities, it is relatively safer when
compared to other investment avenues.
Investors
with little or, no exposure to the stock market can invest in ETFs. ETF is a passive
investing model, which tracks an index as compared to Mutual Fund, which is an active strategy where the investment objective is to perform better than the
index. The United States is the leading market for ETF instruments. Leading
ETFs are from the United States like iShares, which was the first ETF to trade
in the United States. India is in the developing phase and has tremendous growth
potential for ETF as the markets become more efficient like the ones in the United
States.
The cost of the investment will play an important role in measuring returns
from investments. This will make ETFs more popular as they are low-cost
instruments as compared to Mutual Funds. There are cases when the best
performing Mutual funds can beat the index in the long term. Similarly, there can
be chances for them to underperform as well. ETF’s also provides an exposure to
asset class like Commodities, for example, Gold ETF, which tracks the
performance of Gold prices, provides the investor an option to invest in a Gold
commodity, without physical acquisition provides an option for the investors to
invest in the Gold.
The focus of the paper is to study the growth of ETF in India and the United States. We
conclude that, while the ETF market is a bit nascent in India. However, as the market
becomes more efficient, with the entry of new-age players, the market is bound
to grow and one to be watched out for.
INTRODUCTION
An
exchange-traded fund (ETF) is a type of security that involves a collection of
securities, such as stocks, bonds or a combination of both that tracks an
underlying index, although investors can invest in any number of industry
sectors or can use various strategies for the same. The prices of the share
keep fluctuating every day as the shares are bought and sold every day. The ETF
is a good choice for diversification because of the various assets that
underlie within it.
The different ETFs available are,
· Bond
ETF: Government Bonds, Corporate Bonds, State and Local Bonds
· Sector
Specific ETF: Technology, Banking, Oil or Gas
· Commodity
ETF: Crude Oil, Gold
· Currency
ETF: Foreign Currencies e.g., Euro or Canadian dollar
· Inverse
ETF: To earn gains from a decline of underlying stocks or indexes.
ETF can be purchased
through online brokers and traditional broker-dealer. Both companies are
based in the USA. In India Zerodha, ICICI Direct, HDFC Securities are the brokers
through which investment can be made. In addition, Robo-advisory platform like
Betterment and Wealthfront, in the United States actively promote ETF products, these
firms are based out the United States of America.
Source:
visualcapitalist.com
DIFFERENCE
BETWEEN ETF & MUTUAL FUNDS
|
Mutual
Funds
|
ETF
|
|
· A
mutual fund is a type of investment vehicle made up of a pool of money
collected from multiple like-minded investors to invest in securities like
stocks, bonds, money market instruments and other assets.
|
· ETFs
are similar mutual funds that are more of a specific index based that allows
investment in stocks, bonds or a basket of both.
|
|
· Mutual
funds are actively managed by professional money managers, who allocate
fund’s assets and attempts to produce capital gains or income for the fund’s
investors.
|
· ETFs
are passively managed and based more simply on a particular market index.
|
|
· Mutual
funds typically come with a higher minimum investment requirement
|
· There
is no minimum investment specified for ETF
|
|
|
|
|
· Mutual
funds follow an index such as S&P’s 500.
|
An ETF tracks an index, i.e., it tries
to match the price movements and returns indicated in an index by assembling
portfolio similar to index constituents
|
|
· Mutual
funds can only be traded at the closing net asset value.
|
· Exchange
traded funds are traded throughout the course of the trading day.
|
|
· Mutual
funds have varying operating expenses
|
· ETF has lower operating expenses
|
|
· Mutual
funds have a higher fee and higher expense ratio.
|
·
The
expense ratio and fee of ETF is much lesser compared to mutual fund.
|
|
· Mutual
funds have more tax liabilities than ETF
|
·
ETF offers
tax benefit to its investors.
|
|
· Mutual
funds have lower liquidity compared to ETF
|
·
ETF has
higher liquidity which is related to the liquidity of the stocks included in
the index
|
|
· Mutual
fund shares can only be purchased directly from the funds at the net asset
value price fixed during the trading day
|
·
An ETF can be bought and sold
anytime on the stock exchange, at the prevailing market price.
|
GROWTH
OF ETF IN INDIA
Exchange
Traded Funds helps investors to diversify their portfolios by owning a range of
companies in the Indian market which is one of the world’s largest emerging
markets. Indian ETFs track the performance of basket of securities that trade
on the National Stock Exchange which benefited the investors from the Indian economy that expanded by 6.1% in 2019.
India got its first
Exchange-Traded Fund in 2001, when Benchmark Mutual Fund with a defined
objective to track the Nifty-50 index, since then Benchmark continued to be
India’s pioneers in India with the launch of first Fixed Income ETF in 2004 and
the first Gold ETF in 2007, although, Benchmark changed hands from Goldman
Sachs in 2011 and Reliance Mutual Fund in 2015. Out of all, Reliance tends
to stand at the top in ETFs and Reliance mutual funds are purchased by Nippon mutual
funds.
Source:
tradingqna.com
In the period of 2009-2014, more than 50 % of
the totals ETF in India were in gold funds. Since 2015, the ETFs have not just
grown bigger but more diverse. Assets under management for ETFs has grown from approximately
13800 crores in December 2014 to more than 1,41,500 crores as of May 2019 which
is almost 10 times growth in less than 5 years with major contributions from the equity segment. The major reasons for this growth were the following factors,
1. In
March 2014, the Indian Government decided to raise money by divesting its shares
in Public Sector Undertakings through ETFs. The Indian government thus uses ETF
as a tool to raise capital and disinvestment.
2. Employment
Provident Fund Organization (EPFO) is the authority charged with the
investing/managing the PF and PPF accounts of all Indians which decided in
August 2015 to take equity exposure only via ETFs. This added a huge increase
in the growth of ETFs as more people contribute to their PF/PPF accounts.
3. Another
major factor for boosting the growth of ETF was the underperformance of active
mutual funds below the benchmark index in 2018 which diverted the interest of investors
from active to passive fund alternatives.
4. Growing
investor awareness and education through SEBI, Asset Management Companies (AMCs),
brokerages who recommend ETFs to new investors.
Benefits
of investing in ETFs
1. Low
cost: ETFs are cost-efficient. The expense ratio of an ETF which is less than
0.5% compared to 2 to 2.5% for actively managed equity funds
2. Liquid:
ETFs are marketable securities that can be bought and sold at any point in time
of the day therefore it is more liquid compared to mutual funds or PPF.
3. Transparent:
ETFs track the stocks and the proportion of underlying index can be known
before-hand.
4. ETFs
don’t require a fund manager thus errors of tracking the index from the same
can be avoided.
5. ETFs
tend to outperform the actively managed funds in the long run.
6. Expense
ratio is low
7. Diversification
is high thus the risk seems to below.
ZERODHA – India’s leading
brokerage company foray into Asset Management business
Index Funds are a type of mutual funds that mimics
the performance of the market index. The two major Market Indices in India are
S&P BSE Sensex and the CNX Nifty.
Zerodha is India’s largest discount broker, which
aspires to start its own Asset Management Company (AMC) in a year’s time. Zero
started its venture in 2010 as an “Rs.20 per order broker” and gained
popularity as a low-cost and high-volume derivative trader. Zerodha handles
four million trades a day on the exchanges. Zerodha introduced its coin
platform which is a direct option of mutual fund schemes to the investors. This
led to Rs.5500 crore assets under management.
The AMC of Zerodha aims at focusing on ETF as its
smart beta thereby providing benefits of cost-effectiveness of ETFs and the
benefits of active management. Low-cost ETFs offer attractive risk-adjusted
returns. Smart beta ETFs provide different dimensions to the portfolio.
Zerodha’s success in the AMC depends on setting up
the right investment team, launching the right product for the right investor
at the lowest cost. Therefore, mutual fund industry has a long way to go and
the entry of more firms entering the businesses will increase the competition
among stakeholders and benefit them.
GROWTH OF ETF IN USA
In comparison, the US economy offers a more stable
growth and American securities have a more secure cash flow. Vanguard pioneered
the ETF growth in the US market.
There has been a growth of about six-fold over the
last decade to $3.4 trillion, according to the Investment Company Institute.
Largest companies like utilities, technology, real
estate and consumer discretionary have the most reliable future growth and
profitability attracting more than their share of the world’s capital. Both
stocks and bonds seem to have a low-growth, tame-inflation and high-liquidity
environment.
US based ETFs have racked a record of $4 trillion in
assets under management as of this year with 136 ETF providers offering 2062
ETFs to investors. The growth of ETFs has seen a positive escalation and are expected
not to turn opposite of that fact. ETF industry is globally $2.5 trillion
bigger than the hedge fund industry.
Nearly about 60% of the trading volume of the
American Stock Exchange is captured by the ETFs out of which the top 10 ETFs
trading on US exchanges accounts for 28% of the total US assets under
management with top 20 US ETFs accounting for nearly 40% of assets in the
space. Same goes for ETF issuers. The top five ETF providers - iShares by
BlackRock, Vanguard, SPDR, Charles Schwab and First Trust - preside over 87% of
the total assets in the ETF market, with iShares and Vanguard alone managing
65%, ETFGI reports.
CONCLUSIONS
According to research firm Global ETFs Insights
Summit (ETFGI), there are now at least 5000 ETFs trading globally with more
than 1750 based in the US. The AUM of ETF in India grew 35.4% between
April-December 2019 and the share of ETFs in total equity AUM rose by 300 basis
points to 18.73% since the beginning of the fiscal year. In India ETF are
emerging as an effective alternative investment avenue. This ensures greater price
stability for Indian assets. In US it took one year for AUM to reach $1
trillion but from $3 trillion to $4 trillion it just took 2 years. The total ETF
assets grew from approximately $770 billion in 2008 to more than $5 trillion as
of 2019.
In India, the ETF market is now at an interesting
threshold as ETFs are back into focus due to the underperformance of active
funds. ETFs reward the economies of scale. Thus, an ETF provider or owning a
large ETF has the advantage of charging lower-fees and put the product in front
of customers. Therefore, ETFs will become as popular as mutual funds sooner or
later thus providing better returns for long-term investors.
As the Indian market becomes the more efficient generation of
excess return as compared to the benchmark index, will be increasingly
difficult for Mutual funds, which will see a steady movement of assets to ETF
products. Secondly, with the entrant of
discount brokerages like Zerodha in asset management, with a primary focus on low-cost ETF’s. ETF is bound to grow in India, just like how Zerodha transformed
the brokerage industry and the entrant of new-age FinTech firms, will see a
transformation in the ETF market.
REFERENCES
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