[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.

A Strong Start For China’s Cross-Market ETFs

China saw two new launches, one on each of the two mainland exchanges. In Shanghai , Bosera listed the self-explanatory SSE Natural Resource Index ETF, together with a feeder fund aimed at attracting retail investment. And in Shenzhen, Harvest listed a product based on the SME-ChiNext 400 index, which incorporates stocks from both of the Shenzhen Stock Exchange’s smaller company boards (the SME board being relatively more mature and ChiNext being home to earlier stage, more speculative stocks). Both ETFs have a TER of 0.5 percent.

However, perhaps more notable are a pair of ETFs scheduled to begin trading next week. These are the two cross-market ETFs based on the CSI 300 benchmark that will include stocks from both Shanghai and Shenzhen exchanges within the same ETF for the first time, marking a step forward for China’s market infrastructure in terms of settlement complexity.

Both funds have done very well in initial fundraising: Huatai-Pinebridge’s product, which will list in Shanghai, pulled in RMB33bn (US$5.2 billion), while Harvest’s Shenzhen-bound offering achieved RMB20bn. This includes a total of RMB3.3bn (RMB1 .8bn in the Harvest fund and RMB1.5bn in the Huatai-Pinebridge fund) from portfolios managed for China’s National Council for Social Security Fund, which could be either a sign of support for the new products or an attempt to support the lacklustre mainland equity markets.

Another A Share ETF For Taiwan

Lastly among new listings, we saw the launch of another A share ETF across the straits in Taiwan. Polaris Securities—now owned by Yuanta, but retaining its own brand identity for now—launched the P-Shares SSE50 Securities Investment Trust Fund ETF, which will track the SSE50 index of Shanghai-listed stocks.

This is Taiwan’s fourth A share ETF, the others being a direct fund from Fubon Securities, a cross-listing of a Hong Kong-based product from BOCI-Prudential and a Polaris-run feeder into another BOCI-Prudential product. As with most A share products, the TER is relatively high at 1.35 percent.

Elsewhere, Pakistan took a step towards developing a domestic ETF market on the Karachi Stock Exchange, after the Securities and Exchange Commission of Pakistan released detailed listing requirements. The regulator previously announced in March that it has approved a regulatory framework for ETFs.

And in Vietnam—which similarly does not currently have any locally listed ETFs—the Hanoi Stock Exchange announced a new index thatit hopes will act as a benchmark for ETFs and index futures. The HNX30 will track the 30 largest stocks that meet liquidity and free float requirements, and will begin being published from the end of June.

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