ETF flows show signs of revival in emerging markets, but India an outlier

India saw pull-outs from emerging market (EM) exchange-traded funds (ETFs) over the past week, despite flows in such ETFs having shown signs of revival. The ETFs withdrew $31.3 million for the week ended February 14. China, on the other hand, saw inflows of $37.3 million. Most of the EMs saw positive flows, with Indonesia the only other to see some outflow ($5 million) during the week.

According to foreign fund managers, receding worries regarding a major global outbreak of Coronavirus led to improved sentiment. "Rising COVID-19 fears, notably around Chinese growth, led to the first cut in a survey of fund manager about global growth, profits, and inflation expectations, held since October 2019,” BofA Securities said in its fund manager survey note.

The survey pointed out that allocation to EM equities rose 3 percentage points to 36 per cent overweight (OW), the highest OW status since March 2019. Overall, EM ETFs saw flows of $265.8 million during the week. In previous weeks, they had seen outflows.

PSB stake sales through ETFs to help govt achieve FY20 disinvestment target

The government will depend heavily on resource mobilisation by selling its stake in public sector banks through the newly launched financial sector ETFs.

Government sources said that ETFs have been saviour for government disinvestment plan for the past few years and even in FY20, these exchange trade funds would help it to surpass the targets set for the year.

The NFOs and FFOs of these ETFs had received huge response from all categories of investors.

The total subscription received by the Centre from various ETFs launched so far stands at Rs 1.87 trillion and of this government has retained over Rs 51,000 crores in the last five years, said DIPAM in an estimation of the proceeds from such funds.

Recently DIPAM said keeping in view the encouraging response and demand for such product, the Government proposes to create and launch a new ETF in addition to the existing two ETFs, comprising stocks of listed PSBs, Public Sector Insurance Companies and public sector Financial lnstitutions.

In 2018-19, the government raised Rs 18,729.85 crore through Bharat 22 ETF in two tranches. It raised another Rs 26,350 crore through CPSE ETF. DIPAM has raised Rs 2,350 crore against a disinvestment target of Rs 90,000 crore for the current fiscal. In 2018-19, it raised Rs 84,972.16 crore as disinvestment proceeds against the budgeted target of Rs 80,000 crore.

The usual mode of taking a partial disinvestment offering of CPSEs and other public sector enteritis to the market include initial/further public offering, offer for sale through stock exchange and Institutional Placement programme.

The proposed new ETF will serve as an additional mechanism for the government to monetize its shareholdings in listed PSBs, PSICs and PSFls that will eventually form part of the new ETF basket. For this, the government will select and appoint one Advisor with experience and expertise in advising on creation and launch of ETFs/ Mutual Funds/Index linked fund. The last date for submission of application by merchant bankers, investment bankers, consulting firms, financial institutions and asset management entities is July 26.

Pressing for ETFs as a preferred tool of realising value of the PSU stocks, DIPAM said an ETF is a security that tracks an index fund but like a stock traded on the exchange. The constituent stocks are listed and actively traded and may have representation from various sectors to provide ETF unit holders adequate diversification.

Due to risk diversification in an ETF product, there is greater participation by retail individual investors, which help deepen the market for equity based products. Further, ETFs are attractive instruments for investors due to lower expense ratio and higher transparency.

Both existing ETFs have provided a great investment opportunity to small retail, PF/Pension Funds and HNI investors as they have been able to diversify their investment exposure across a number of companies through a single instrument.