Financial advisors are not likely to recommend clients to go for passively managed funds, or ETFs, as they expect actively managed funds to continue to beat their respective benchmarks. Some experts, though, suggest that ETFs are an untapped market and advisors would do well to recommend these to their clients.
“At present we don’t recommend ETFs because active funds are able to beat their benchmarks and most of our clients are here for the long term,” says Gajendra Kothari, MD and CEO of Etica Wealth Management.
ETFs are still at a nascent stage in India. IFAs have been warming up to them, but with caution, in the past few years.
ETFs are typically cheaper than actively managed mutual funds as they have lower operating expenses. Even then Shifali Satsangee, CEO of Funds Ve'daa, would recommend actively managed funds to her clients. “Actively managed funds are capable of better alpha creation than passively managed ETFs,” she says, and goes on to explain why ETFs too have costs: “There is a certain commission you pay to brokerage houses while trading, which may push up the costs.”
Advisors are also not likely to recommend ETFs because, they believe, it will not be easy to track their performance. “It will be difficult for us to monitor a client’s portfolio. That’s why we don’t recommend ETFs,” says Ranjit Dani, founder director, Think Consultants.
D.P. Singh, ED and CMO (Domestic Business), SBI MF feels it is high time that IFAs recommend ETFs to their clients. “Financial advisors should advice their clients to go for ETFs because the total expense is low and they can easily replicate the market. The market is undergoing deepening, and hence generating alpha will become difficult,” he says. He then adds that when generating alpha becomes difficult, investors would like to contain the expenses which go into maintaining their portfolios.
Vineet Arora, Executive VP, ICICI Securities, too is in favour of including ETFs in the portfolio. “From an advisor angle, it is always good to have a portion for asset allocation and a portion for alpha in the portfolio. Proper asset allocation will give returns in the long run while actively managed funds can be relied upon for incremental returns,” he says.
ETFs are a clean and easy way to maintain asset allocation, the Executive VP of ICICI Securities believes. “Clients of fee-based financial planners will look to invest in ETFs as an asset class. As clients of such advisers already have investments in equities, they can recommend ETFs to their clients as ETFs are the cheapest product available to them,” adds Vineet.
If there are apprehensions among a section of financial advisors that lower cost of maintaining portfolios will bring down their client fees, experts dismiss such fears, saying the issue is not relevant for fee-based financial advisers as clients compensate them directly. Even other advisors, i.e., those who get commissions from manufacturers, need not worry as the ticket size in ETFs is larger than actively managed mutual funds, the experts say. The bigger ticket size offsets the lower rate of commission.
“It is a fact that people who would generally invest in ETFs will have a big ticket size. Hence in absolute terms financial advisers will be able to earn enough remuneration,” says D.P. Singh.
Even though ETFs have lower expense ratio, the need for a demat account acts as a hindrance. “Most of our clients don’t have a demat account; buying ETFs is therefore not possible,” says Ranjit Dani, of Think Consultants.
Even those IFAs who are not likely to recommend ETFs are keeping the door half open. “If in the future the active funds are not able to add any value, then slowly and steadily we will be moving into ETFs,” says Gajendra Kothari of Etica Wealth Management.
Ranjit prefers to be cautious. "We would wait to see others try out ETFs first. Based on their success and acceptance among investors, we would then recommend it to our clients,” he says.
In FY 2016-17, equity ETFs saw net inflows of Rs24,000 crore compared to Rs8,700 crore in the previous year, an increase of 175% or Rs15,000 crore. The category witnessed record inflows last fiscal due to the overwhelming response to the further fund offer of Reliance CPSE ETF and increase in EPFO’s contribution.