The exchange-traded funds (ETFs) market in India is in its intial stage. With limited ETF products in the fund houses’ kitty, the business in this category has not grown much in the country. David Abner, director of Institutional ETF Sales and Trading at WisdomTree Asset Management, a well known figure in the ETF market, sees a huge opportunity in India to develop the business. In a conversation with Chandan Kishore Kant, he explains how market participants and AMCs should tap the domestic market. Excerpts:
What are your first thoughts on the Indian ETF market?
The Indian ETF market reminds of the ETF market in the US merely a decade ago. I draw a lot of parallels to the market here now to what I saw there, then. There were very few funds and most assets were highly concentrated in a few funds. Investors’ knowledge about ETFs was just beginning, as is the case in India currently. Based on all the dynamics of this country and its investors, I think it is important to educate various market participants and bring products here, and one will soon realise the growth. Compared to the products which existed before, ETFs offer real benefits to investors.
You held meetings with Indian investors and other market participants, including the regulator. What sense do you get?
There is a tremendous opportunity out here. There is huge interest in the product, people are trying to understand the product from all perspectives. Investors, heads of advisory platforms, market makers, large banks and the regulators here are interested in building ETF businesses. They believe it makes sense for the investors here in certain ways. All these market participants need to come together and become aligned to help this industry grow.
What challenges do you see in developing the ETF business in India?
There are a couple of challenges which are very important. Market makers and traders would have to come into the product, because they act as conduits between the underlying basket and the ETF. You need traders to be willing and to understand the market. Second, educating people about new investment products. How to use these products? Where do they fit in the portfolio? How do they work? It’s important to teach people that an ETF trades like a share but acts like a fund. These are actually funds in the convenience of a share form. Education takes a lot of time. Regulators and market participants should take this challenge.
Third, the way people invest here is different (which is a case for every market). Therefore, products have to evolve to satisfy investors’ needs. Currently, there are very limited products in India in the ETF category. It’s a bigger learning for the ETF issuers in this market to figure where they can bring the benefits of ETFs to investors in a way that investors will believe in those benefits. I see that in gold ETFs.
What’s your take on the existing product basket in ETFs being offered in India?
This is a very sophisticated market. You have to offer products in asset categories which fulfil needs. I don’t think players here should look at the US, copy and repeat. Rather, take the products investors are using now, look at the market around and bring those products into ETF form. Mutual funds are like a black & white TV and an ETF is like a plasma TV, which offers all the benefits along with the current modern efficiencies. That’s how it is . An ETF is still a TV (still an MF) but has other benefits. So, there should be conversion of more of mutual fund-like products into an ETF structure, rather than a wholesale copy of what’s going on in the US. I think that is happening in some of the existing products here in India.
Was the attraction towards gold ETFs because of the high gold prices or investors got more clarity on a product like ETF?
That’s a perfect example. First and foremost, investors are showing they are comfortable with the ETF structure if they find a need for it in their portfolio. Gold became interesting to investors here in India. They wanted to get that access and they started buying gold ETFs. This is what we have seen in the US as well. Where the investors’ interest grows, market makers grow, volume grows and ultimately assets grow. Hit on more products that are interesting to the investors and solve needs for their asset allocation; these things will take off.
There has been demand for silver and oil ETFs. However, the regulator has not yet approved it.
It is logistically very difficult in this market right now to get products. The regulators are learning how these products work. One cannot blame them for going slow until they understand things.
What does Goldman Sachs’ entry in the Indian fund market signal?
ETFs for the last two years have been a bright spot in the financial market globally. Around the world, players are making aggressive moves to get into the ETF market in some form. Goldman Sachs, obviously, has been a very savvy investor and I think they saw some value here, which they thought nobody else had realised.
