[This article originally appeared on our sister site, IndexUniverse.eu.]

Anyone who has been watching the Indian market since the end of 2010 will know that there has been little good news to go around. A steady stream of poor economic data, stalled reforms and corruption scandals have turned off many foreign and domestic investors.

Now the gloom is increasingly extending from investors to the investment management industry itself. According to reports in the Times of India and other local media, US indexing specialist Vanguard has reconsidered its plans to enter the Indian mutual fund industry, after starting talks last year on obtaining a mutual fund licence and beginning a search for potential partners.

How serious Vanguard’s intentions were is unclear, since the firm was also said to be considering entering India in mid-2010, but apparently decided against it on that occasion as well. But coming shortly after Fidelity abandoned an eight-year effort to crack the market—it sold its Indian operation to conglomerate Larsen & Toubro in March after having made a loss in every one of those years— the news demonstrates quite how challenging a market India is at present, despite its clear potential.

Local mutual funds have grown rapidly over the past decade, with assets under management up more than fivefold to US$134 billion. But so has the competition among the foreign and local firms that are aiming to establish themselves, resulting in low profitability for many. And a recent ban on distributors charging upfront fees on new sales has only increased the direct costs that fund houses are incurring when trying to gain market share.

For Vanguard, which has built its entire business around low-cost, no-load funds, the new distribution model might not have been too offputting—but the dire performance of the Indian market is another matter. With stocks down 25 percent since November 2011 and no sustainable rally seeming to be in sight, this is certainly not the obvious time to launch equity index trackers.

Recent trends in local ETFs emphasise this only too well. After the latest sell-off, around 85 percent of the ETF industry’s US$2.1 billion in assets are now lodged in gold funds and all but one equity ETF has less than US$20 million in assets. Meanwhile, almost the only talk of new equity products is being driven by the government’s efforts to support its privatisation programme. If Vanguard has decided to go slow on testing India’s appetite for index strategies, it is certainly not alone.

Mirae Expands In Korea

While India lags, Korea continues to develop faster than any other Asian ETF market. There were six new launches this month, including four new equity sector ETFs from Mirae Asset Management. These are based on indices from local financial information firm FnGuide and are tracking the software, chemicals, automobile and securities sectors. The total expense ratios are 0.42 percent.

At the same time, Mirae also launched a moneymarket ETF with a TER of just 0.09 percent—it is a telling sign of just how competitive the Korean ETF industry has become that this doesn’t qualify as the cheapest product on the market. Fixed income funds from KB Asset Management and Korea Investment Trust Management are cheaper still on TERs of 0.08 percent and 0.05 percent, respectively.

With these launches, Mirae continues to stretch its lead in terms of product range. There are now 119 ETFs listed in Korea, with Mirae having 43 and Samsung Asset Management running 27, while Woori Asset Management is in third place with 15. However, in AUM terms, Samsung remains a long way ahead with over US$5 billion in its funds, while Mirae has around US$1.2 billion.

Samsung’s main headstart in AUM comes from its US$2.5 billion Kodex 200 ETF, which tracks the main Kospi 200 equity benchmark for the Korea Stock Exchange. But in a market growing as fast as this, nobody seems to want to stand still—hence its new listing this month, the Kodex MSCI Korea ETF.

This is the first domestic ETF to employ an MSCI index and while the returns from the Kospi 200 and the MSCI Korea are likely to be similar, the latter could appeal to institutions that favour benchmarks from providers such as MSCI—some view them as best practice in index design. The TER is 0.35 percent.

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