Cover Story
Global investors have been unable to take meaningful exposure to India through ETFs
A dual listing of Bharat-22 ETF on global exchanges could serve as a huge opportunity for the government to redefine investing in India
Sanjay Sachdev Chairman , ZyFin Holding PTE Ltd .
Disinvestment through the route of ETFs with the underlying of strong fundamental companies has been a unique initiative that the Indian government has taken . Bharat-22 ETF is a step forward in this direction with the underlying of smart beta formulation , making the deal sweeter for local investors . This comes on the back of the success that Indian government had with the Central Public Sector Enterprise ( CPSE ) ETF launched in 2014 , which was more of a pure passive investment strategy .
The Bharat-22 ETF comprises many stocks in a unique combination of private and public sector companies . Of these , 16 companies are Maharatnas / Navratnas or Miniratna-1 . These 22 stocks span six different sectors of the Indian economy - industrials , finance , utilities , energy , FMCG , and basic materials , which directly stand to benefit from the various key reform initiatives undertaken by the government , like financial inclusion , Make in India , infrastructure development and others . With sectoral capping at 20 per cent and stock-specific capping at 15 per cent in place with an annual rebalance , the Bharat-22 ETF ensures diversification and is likely the only smart beta ETF that offers investors the opportunity to
partake in India ’ s growth story in a balanced way .
ETFs have globally received a lot of attention from both large institutional investors managing long-term sovereign funds as well as retail investors , and have increasingly become a preferred mode of investment . Assets under Management ( AUM ) of ETFs have grown from US $ 1.75 trn to over US $ 4.3 trn in a space of five years – representing a CAGR of 19.70 per cent . Number of ETFs have also grown exponentially from 3330 in 2012 to more than 5150 in 2017 .
A large part of this growth can be attributed to the fact that ETFs are the most efficient and lowest cost financial products resulting in higher returns in the hands of the investor and also due to mature markets offering limited alpha generation opportunities to fund managers , thus making a strong case for smart beta and passive investing . This , in turn , has driven investors ’ attention increasingly towards smart beta and rule-based asset management strategies where ETFs score over other products .
Despite the trailblazing growth in ETF AUM , global investors have been unable to take any meaningful exposure to India through ETFs . A case in point is the fact that while USA has ETF AUM of over US $ 3 trn , which amounts to close to 70 per cent of the Global ETF AUM , India focused ETFs ( ETFs with more than 90 per cent allocation to India and over 90 per cent assets exposure to equities ) have a cumulative AUM of less than US $ 15 bn . This is less than 0.5 per cent of the total USA ETF AUM . The comparable figure is even lower for the whole of Europe .
ETFs have globally received attention from institutional investors managing long-term sovereign funds
Cross listing or a dual listing of the Bharat-22 ETF in global markets viz USA and London would be an ideal first step to bridge this gap and provide global investors with the option to diversify their holdings and take exposure to a high yielding asset class in their portfolio . They can derive extra comfort from the fact that the Indian government holds a substantial stake in most of the constituent stocks of the Bharat-22 ETF . Also , it has allowed Employees Provident Fund Organisation ( EPFO ), India ’ s largest provident fund body , to take part in equities only via CPSE ETF and in all likelihood , would continue to do so through Bharat-22 ETF .
This will enable greater participation in the ETF from a larger ecosystem of investors . Also , as the investor base widens , it will lead to greater liquidity in the ETF , which in turn would benefit all participants .
The success of Masala Bonds , as witnessed in the recent past , is a definite sign of global investors acknowledging India ’ s improving macros and increasing allocation to India . This way , global investors , including the retail category of investors , will have an option to take exposure to India at low cost merely at the click of a button .
A dual listing of Bharat ETF on global exchanges could serve as a huge opportunity for the government to redefine investing in India and take India to the global markets as opposed to bringing global investors to India , as has been the trend in the past . Additionally , with several pro-growth reforms undertaken by the government and the resulting improvement in India ’ s macroeconomic scenario , the timing may be ideal to consider such a move .
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Outlook Money December 2017 www . outlookmoney . com