Globally a lot of money Is moving out of active product into passive products like exchange traded funds (ETFs), says John Davies, vice president - global head of exchange traded products, S&P Dow Jones Indices. In interview with Samie Modak, Davies talks about why the same trend is yet to catch hold in India. Edited excerpts:
What are the global trends in the ETF market?
Even though the global economy was in turmoil, the ETF market, last year, saw a record year in terms of net new money flowing into the products. About $270 billion went into the ETF market. In Q1 this year it was about $76 billion, so we could be looking at another record year again for ETFs.
The general global trend is that money is moving out of active products into the passive products and ETFs are the major beneficiaries of that.
Emerging markets had a good year as well. The Asia Pacific region in general had the highest percentage growth in ETFs last year than any other region. Although the base is relatively low compared to other regions, the growth can be greater in this region and a lot of that accounts to China.
The Indian ETF market has still not taken off?
There are number of factors involved. The Indian market has been a very active market, investors like to trade. Also, investors like to buy gold. In the last six years, the number of individual products has gone up from 5 or 6 to about 37. So there is growth in terms of number of individual products. Level of access to investors in these products is still relatively low.
There are number of reasons for this - high securities tax and only certain type of investors being allowed to invest. The securities tax is now being reduced and my sense is now pension funds and insurance companies are increasing allocation to ETFs.
We believe while it is still a nascent market, there are positive signs for ETF providers.
Was the current drop in gold prices aggravated by ETF sell off?
You look at gold in two ways. It is a financial asset and it's also a physical asset you want to hold. Most institutional investors use gold exposure as inflation hedge. The drop in assets of ETF gold internationally is more due to the fact that gold prices have come down and people are moving their money into other products for inflation hedging.
In India, it is looked on as something to hold. It is very much more a retail story. Here you are seeing increase in assets due to the different mindset. India always has a different affinity to gold than international investors. I don't think that's going to change anytime soon.
The products based on international indices launched here have not done well.
Every market as it grows and evolves has a home bias. It is just a function of the fact that the Indian market is still relatively young. Investors are very active trading in local market. Globally, there is a trend to move assets out of active into passive. That trend has not yet taken hold in India. But the market has grown from 6 ETFs to 37 now, showing that the trend is moving toward passive products. That will then lead to investors looking into more international based products.
Can the current bouquet of exchange traded products in India be expanded?
A lot more can be added. I think there are many more ETFs that can be added. Again, we will be looking at the existing indices with BSE, then see if there is any gap. It is not just a case of having an index to represent particular size or segment of the market. Again India is a very equity-focused market. At the moment, Indian investors don't have the full toolkit of ETFs to provide the exposure to all segments of the equity and fixed income market. That's eventually where the market will get to. As the investment attitude and culture evolves, other asset classes will be required to be part of the portfolio.
S&P Dow Jones Indices and BSE have recently entered into a partnership. What are the immediate changes that one can expect?
In the initial stages, we will be reviewing all of the existing indices of BSE. Look at how they manage and maintain them. Then, in conjunction with the BSE, figure out what is the best way to move forward. Over the next few weeks, a number of people are coming over from New York and London to visit BSE to discuss different aspect of the existing index business and how we can integrate S&P Dow Jones Indices' international practices and expertise into what's relevant for the Indian market.
Is S&P in talks with Sebi to launch new products?
S&P Dow Jones Indices is an index provider, not a product provider. Ultimately, it's the product providers responsibility to talk to the regulator and get their products approved.