In 2020 the Indian ETF market continued to expand finishing the year with ~$37B in assets spread across 99 listings. This represents a growth of $23.3B or 171 percent, which placed India as the highest growth ETF market in the Asia-Pacific region on a percentage basis. India represents the 7

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the largest ETF ecosystem regionally and the 4th largest emerging market ETF ecosystem in the region.

I think it’s important to put that into a broader context as well. The Indian ETF market is over twice the size of the entire Latin American ETF market on an asset basis. It is larger than each individual country in the Middle East and Africa including developed countries such as Israel. When looking to Europe it

would be the largest emerging market country and ahead of multiple developed markets such as Italy and the Netherlands which have fairly robust ecosystems.

There are certainly several factors that drove this growth for the market which reached its 20th anniversary this year. The most notable comes down to relative outperformance vs active funds.

According to S&P DJI’s SPIVA report over a three-year period, the S&P BSE 100 Index has outperformed 83.08 percent of active funds. So not only has the most tracked index on the Indian ETF market beaten over 8 out of 10 active funds but an investor would have to consider that an active fund that did outperform is likely to not outperform in subsequent years. This is identical to the underlying force driving flows into ETFs across the globe which has seen passive overtake active on a percentage of total assets basis.

Here in lies a major headwind for the ETF industry in India. Active funds see fees that are so drastically higher than ETFs that it disincentivizes institutional ETF use. An Equity fund may reap fees of 200 bps compared to an ETF which costs 5 bps. The only way to correct this is through investor education and at

the end of the day it will be Indian investors that have to demand ETFs in order for fund managers to forgo those fees. That is exactly what has happened in the US and globally and there is no structural reason it can’t occur within the Indian market as well.

Even with institutional headwinds, ETFs are making inroads in India. ETFs more than doubled their market share of the Indian mutual fund industry in 2020 moving from 4 percent of mutual fund assets in 2019 to 9 percent through year-end. This growth comes on the heels of regulatory change that will illustrate the value of ETFs to investors. In 2018, SEBI changed benchmarking rules for active equity funds to more accurately depict active fund performance while in 2013 SEBI imposed standards for fee-based advisors

that would see them exercise a greater duty of care for investors when compared to institutional distributors.

Both these changes have set the stage for continued long-term growth into low-cost passive funds in the Indian market.

The author, Tyler Carter, is Associate Director, Global ETF Strategy at S&P Dow Jones Indices. Views expressed are personal

(Edited by : Anshul)