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Mitali Bhutta made post

Can debt ETFs really add value and what are the challenges to the debt ETFs in India?

Answer
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Dawn Cherian answered.
9 months ago


If you take the analogy of equities, the shift to passive funds has been sharp only in the last few quarters. One can attribute that to the CPSE ETFs but the fact is that people are buying passive asset classes in equity. Passive debt acquires importance especially after the spate of defaults that we have seen in bonds issued by corporates. Defaults by Jet, IL&FS, Dewan Housing, and Cox & Kings are all cases in point. By opting to invest in a sound index, this problem of bad bond selection can be obviated altogether. Also, the ETF is a passive approach and hence the costs will be extremely flow. The average equity ETF costs about 0.30%, so debt ETFs should also be extremely economical.

Of course, there are challenges too, as in most cases. For the bond ETFs as a concept to take off in a big way, there are some basic pre-requisites. Firstly, you need to have solid indices well crafted and managed by a team of index experts. That does not exist in equity indices too. Secondly, to adhere to the current SEBI norms, you need a much larger array of bonds so that ETF portfolios of similar ratings and durations can be created and also managed. Lastly, the rating system in India is erratic with drastic downgrades creating its own set of problems. That will also have to be factored. Despite these challenges, the push to debt ETFs is a step in the right direction!