By Rajagopal Menon
Exchange traded funds or ETFs were introduced with the objective of providing exposure of a diverse range of assets to the average investor. Without an in-depth understanding of various asset classes, a potential investor would be able to own various assets in a cost effective way and can be traded like other assets. ETF prices are determined by net asset value (NAV) of all underlying assets.
According to the National Stock Exchange Website, India witnessed the inception of Exchange Traded Funds (ETFs) in 2002 when Nippon India Mutual Fund introduced the first ETF on the Nifty 50 Index. This ETF was listed on NSE on January 8, 2002, and saw trading amounting to Rs. 1.30 crores on the first day. It took over 19 years to reach the milestone of the 100th ETF being listed on NSE. Recent NSE figures indicate that the AUM of passive funds in India which include ETFs has topped $5 trillion ($67 billion). At present, there are 16 ETFs listed outside India with a combined AUM of $1.3 billion. Overall, ETFs have been a success in India and continue to show great potential.
What investors look for in ETFs
Investors look for exposure to a broad range of assets, across various sectors, industries, or geographic regions. This helps them understand how they can mitigate any potential risks. Another reason why ETFs have gained more popularity than mutual funds, a widely popular investment tool, is because it is more transparent, easily tradable and offers cash to holders almost immediately upon selling. In the USA, the 2008 financial crisis hit investors pretty hard, which positively impacted assets under management for ETFs. Within 10 years after the crisis, the funds in ETF increased by a whopping 540%! Around the same time Bitcoin was conceived and started gaining prominence . Although it had way less takers than ETFs which were already popular, its growth for the next decade was decent. It’s safe to say that Bitcoin being available on ETFs is like the ideal combination of two of the few silver linings that came after the 2008 fiasco in the global economy.
If Vanguard and BlackRock are synonymous to the growth of ETFs in the USA post 2008, then Bitcoin and Ethereum could be known as the ETF adoption catalyst. An ETF index which boasts of the two largest crypto by market cap will be a crowd puller for the three following reasons.
- Despite multiple bull and bear cycles, external factors creating volatility, Bitcoin’s return on investment has been consistent and has come to be known as a hedge against inflation
- The rise of decentralised applications on the Ethereum network, and institutional investors adopting the blockchain for new product verticals is helping it grow and also become highly valued, which is a boon for investors
- The traditional mutual fund market which although is quite popular doesn’t provide the same prospect of braving adverse market conditions such as inflation, interest rate changes, or unfavourable macroeconomic factors
The case for India
In India, the YoY increase in the number of demat accounts can be linked to the growing popularity of ETFs. However, this isn’t concrete evidence of its demand. In fact, most people are not aware how stress free it can be to have your funds passively managed with zero lock in periods, high liquidity and lesser tax hurdles. ETFs are traded on stock exchanges in India and could be a great way for certain crypto sceptics or non crypto natives to gain exposure to the Bitcoin magic.
Expense ratios are a key deciding factor for investors who have experience dealing with ETFs. A low expense ratio doesn’t necessarily mean high long term returns. But in order to encourage people to try crypto based funds, some ETFs have reduced their expense ratios considerably for the initial stages. ARK 21Shares, BlackRock, Bitwise, VanEck among others have planned a minimal expense ratio onboarding till they reach their desired goal in Assets Under Management. This is a golden opportunity to dive into the virtual digital assets space without having to study the market too hard or worrying about funds tied up in certain tokens.
The wall of money flowing into BTC will boost sentiment the world over, including India. Indian investors can make use of the Liberalised Remittance Scheme to invest in BTC ETFs. Under this, one can send up to $250,000 to an overseas jurisdiction in one year. While there are no clear set of regulations regarding virtual digital assets in India, Bitcoin remains an area of curiosity and fascination for many investors due to its borderless and decentralised nature. And since the SEC has given the green light to some of the spot BTC ETFs, investors in India would not need to worry about bypassing any laws in order to gain exposure to those assets overseas.
In the next few months, we will see heightened activity in the crypto ecosystem and a lot of subdued use cases such as metaverse and NFTs reemerge to regain their lost glory. Coupled with this, institutional investors will double down on their investments in the vertical to meet the growing needs of their stakeholders. This will vastly improve liquidity in the market. Bitcoin’s halving is set to increase its price manifold as per popular predictions. And with low expense ratio rates and tax liability set off opportunities, there’s no better time to dip toes into the crypto ETF waters to passively experience some profits and hedge some money for any future adversities.
While many are under the impression that retail investors might not be the right audience for ETFs, a seasoned market expert will know when to make hay and reap the rewards at the right time. The ETF exposure is not just a sentiment boost but an experience that allows users to create the need for similar facilities due to high demand in their domestic markets.
The author is vice-president, WazirX