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Limited Demand For Indian Public Sector ETF
By Cris Sholto Heaton | 28 March, 2012

India’s ongoing need for asset sales to help fund its budget deficit were behind one of the less likely ETF proposals floated this month. According to the Economic Times, the finance ministry is considering setting up a “PSU ETF” to take on stakes in state-controlled companies—known as Public Sector Undertakings—that the government wants to divest.

For the government, the appeal is obvious. Such an ETF would not only allow blocks of shares in several firms to be sold off quickly and easily, but might reduce the problem of poor stock performance that has dogged previous PSU divestments. If enough patriotic retail investors could be encouraged to buy and hold the ETF, the share prices of companies involved would hopefully hold up better than they have in the past.

But from an investor’s point of view, the value of such an ETF seems very limited. The PSUs are of variable quality and the majority stakes held by the state leaves them under obvious pressure to put national interests ahead of private shareholders, as some activist investors are currently alleging. Even where an investor is willing to accept this conflict, there are few good arguments for investing in such a disparate group of stocks as a whole purely because they are all state-run firms.

And in any case, it’s hard to see such an ETF really getting off the ground—the current structure of the local ETF market suggests the demand wouldn’t be strong enough to make a difference. To put it into context, the government’s target for PSU divestments for this fiscal year is Rs 30,000 crore, or about US$5.9 billion. Yet as of last week, India had 33 listed ETFs, with a total of just US$2.1 billion in assets under management.

Even more tellingly, about three-quarters of that sum is held in gold ETFs, reflecting local investors’ strong preference for precious metals over most other assets. While that remains the case, any PSU ETF would seem likely to have to scramble for a very small share of the market indeed.

In fact, ETF development in India has almost stagnated lately, with few providers showing signs of doing more than jumping on the gold ETF bandwagon. The only new listing this month was yet another such product, this one from Canara Robeco, a joint venture between state-owned Canara Bank and Dutch asset management group Robeco.

This is the 13th gold ETF to make it to market and it is hard to see how it will stand out from its peers. Even the total expense ratio of 1.5 percent— although high by global standards—falls towards the middle of the range for India. With the Goldman Sachs-owned Benchmark Asset Management holding around 35 percent of gold ETF AUM, Reliance overseeing another 30 percent and HDFC managing around 10 percent, the market is heavily concentrated and gaining scale is difficult for new arrivals.

Still, the forthcoming 14th entrant in this increasing crowded field is at least trying to differentiate itself. Backed by independent fund house Motilal Oswal, the MOSt Shares Gold ETF will allow even relatively small investors to redeem their units for gold bars on demand, something that could be a selling point with retail investors who have traditionally bought physical gold from jewelers.

Whether that will be enough to make it a success remains to be seen. But it is at least a hint of innovation in a market that now risks lagging behind the rest of Asia.

Lyxor Leaves Hong Kong, Steps Up In Singapore

Lyxor has completed its regional refocusing by delisting all of its 12 Hong Kong-listed synthetic ETFs. As first reported towards the end of last year, the French provider has decided to quit the Hong Kong market for reasons that were widely thought to be related to the Securities and Futures Commission’s tougher rules on synthetic ETFs, although executives have since said that it was driven more by an intention to focus on institutional clients.

Lyxor now plans to base its Asian business around listings in Singapore, where the regulator has so far focused on restricting access to ETFs to investors with a certain level of expertise rather than imposing tougher rules on the structure of the products. This month it launched two additional funds on the Singapore Exchange, bringing its total listings locally to 28.

The new products are Southeast Asian country trackers, following the Thailand SET50 and the MSCI Indonesia indices. Both are total return products that capitalise dividends and have total expense ratios of 0.45 percent and 0.55 percent, respectively.


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