scorecardresearchIndia's ETF market: The growing popularity of passive investing

India's ETF market: The growing popularity of passive investing

Updated: 15 Mar 2022, 12:16 PM IST
TL;DR.
Investing styles and strategies are adapting to the new market, economic, and political dynamics that are compelling portfolio managers to review their objectives and goals.
The debate of active versus passive has been ongoing. The recurring feature of benchmark outperformance is contributing to the adoption and growth of the passive investment space.

The debate of active versus passive has been ongoing. The recurring feature of benchmark outperformance is contributing to the adoption and growth of the passive investment space.

The financial markets have been witness to numerous market cycles, trends, and crises, from the technology bubble in 2000 to the subprime housing crisis around 2007-08 and the collapse of Wall Street in 2009.

The year 2020 brought the unexpected disruptor, coronavirus, and the ongoing pandemic changed the way markets and economies reacted. As with many disruptions, the first reaction was detrimental, with negative market reactions, as businesses were scrambling to adapt to the new environment.

In March 2020, the S&P 500 dropped significantly, including its steepest one-day fall since 1987. It recovered from the low of 2,237.40 on March 23, 2020, to a high of 4,796.56 2 on Jan 3, 2022, a rise of 114 percent. The S&P BSE Sensex reacted similarly, with index levels falling to 25,981.24 on March 23, 2020, and a quicker recovery on October 18, 2021, with a new high of 61,765.59; a rise of 138 percent.

The shift to passive

Investing styles and strategies are adapting to the new market, economic, and political dynamics that are compelling portfolio managers to review their objectives and goals. The growth in passive adoption is evident, with global assets under management having surpassed $10 trillion and over 9,800 products as of December 2021.

India also experienced a significant shift from being almost a purely active market, with minimal concentrated passive interest, to a boom in passive assets and a number of passive products. With assets exceeding USD 50 billion and over 100 products, India’s growth in passive investment has ushered in new investor interest for diverse offerings.

The active versus passive debate – tilting the scales

The debate of active versus passive has been ongoing. The recurring feature of benchmark outperformance is contributing to the adoption and growth of the passive investment space.

The S&P Indices Versus Active (SPIVA) scorecard, which reflects on the trends of active fund management vis à vis benchmarks, has been a testament to the argument favoring indexing, as the statistics seem to tilt the balance in its favor.

According to our SPIVA India Mid-Year 2021 scorecard, over 86 percent of active Indian equity large-cap managers were beaten by the S&P BSE 100 over the previous 12-month period, and the numbers were similar for a three- or five-year horizon, with underperformance rates of 87 percent and 83 percent, respectively. The index outperformance in large caps has been a recurring feature over the past few years.

A new trend for the mid and small-cap segment was a surprise for the market. Over the one-year period, 57 percent of active fund managers underperformed the S&P BSE 400 MidSmallCap Index, and the number was as high as 69 percent over the five-year horizon. This marks the beginning of opportunities for passive funds in this segment for India.

Article
Percentage of funds outperformed by the index. 

In a market that has had participants and product providers showcasing alpha in active portfolios for a long time, there is beginning to be an increased awareness of including indexing in investment strategies.

These SPIVA results are not unique to India, as similar results have been reflected over the one-year period across the SPIVA scorecards. Besides India, SPIVA is also published across another 10 markets, namely the U.S., Canada, Mexico, Brazil, Chile, Europe, MENA, South Africa, Japan, and Australia.

The changing face of passive

Though passive investing is galloping its way into some allocations, it’s still not a significant percentage. Passive assets are concentrated in the developed markets, with the US claiming a majority share, followed by Europe and Japan.

The use of core and satellite strategies based on passive vehicles can be a further catalyst to the growth in using indexing to attain investment objectives. Indexing—whose benefits can include low cost, diversification, flexibility, and transparency—offers a simple solution to gain exposure to a broad spectrum of investment strategies.

The core-satellite strategy is useful not only for active versus passive allocation but can be used tactically to allocate among indexing areas, diversifying within asset classes, geographies, or themes.

Indian investors tend to have had a firm home bias, which has not changed over the last few decades. The pandemic shifted those dynamics, as the benefit of international diversification became evident. The assets in international schemes grew from 9,062 crore to 24,129 crore, a growth of 166 percent.

While US markets led the interest, allocations to emerging markets were also made. In 2021, the Securities and Exchange Board of India revised its limits to permit $1 billion per mutual fund, with a total cap of $7 billion for the industry. However, the industry has reached those limits and is now seeking a revision for them, as interest and assets are flowing into this segment.

Can passive be the new active?

The strong growth in passive investing is encouraging its prospects. India is seeing a heightened interest and resultant product issuances. Active outperformance is being challenged by indexing strategies. The road to passive investment styles dominating markets is a long one, but with new milestones, there is optimism to get there.

(The author of this article is Head of South Asia, S&P Dow Jones Indices. The views and recommendations made above are those of the analyst and not of MintGenie.)

Article
New-time investors must know all the options they have before investing.
First Published: 15 Mar 2022, 12:11 PM IST