The first Indian equity exchange-traded fund (ETF) ever to be listed outside its home country after Indian asset manager Zyfin Holdings listed it on the London Stock Exchange and Deutsche Boerse.

Aiming to offer investor exposure to Indian equities by tracking the performance of the MSCI 1/40 index, the ETF will be run in partnership with London-based First Trust Global Portfolios. Exposure to large and mid-cap segments of the Indian equity market would be given to investors by the ETF which is denominated in three currencies – U.S. dollar, euro and pound.

“We are making it easier for global investors to access Indian markets. Indian markets continue to be constant and stable and global investors don’t want to invest in emerging markets where they have exposure to countries such as Brazil and Russia. They prefer single focus funds,” Sanjay Sachdev, executive chairman at ZyFin said.

Picked from across sectors such as financials, consumer discretionary and information technology, the MSCI India 10/40 index comprises of 74 companies. The index is rebalanced on a quarterly basis for changes in the market capitalization of an index component or its sector classification.

The ETF aims to offer a return in line with the general average return of 17 percent in the Indian ETF space and has an ongoing charge of 0.89 percent.

However, there is always an inherent risk with equity markets, Sachdev warned.

“You need to look at the long-term view in order to mitigate these risks. If you look at it from the risk-return perspective, India stands at a cusp of moving from emerging to somewhere between emerging and developed,” he said.

With the International Monetary Fund projecting India to be one of the fastest growing major economies with economic growth for the current and forthcoming year projected at 7.4 percent, the Indian economy has been growing at a rate of 6.4 percent year-on-year.

However investors are concerned with the risks with the Indian economy. Concerns over the performance of the Indian rupee, political stability, lower rates and its impact on corporate earnings loom even though the ETF follows a benchmark that has a history of outperforming MSCI India and MSCI Emerging Markets index for over 16 years.

Any depreciation of Indian rupee against the dollar will hit the fund’s returns since the fund and the underlying index do not hedge the currency risk.

A massive risk for emerging market currencies has been the strong U.S. dollar. The formation of ‘Fragile Five’ – Indonesia, Brazil, Russia, Turkey and India – countries with weak currencies was done when the trend started in late 2014 as the Fed finally decided to end its bond-buying program. The dependence on the Fed policy continues to dominate even as domestic factors such as policy paralysis also played a role.

The volatility in the U.S. dollar is still a worry even though with better growth, domestic reforms and a fairly stable currency, the Indian economy has come a long way since then. A number of other emerging markets such as Indonesia, Mexico and South Korea also face the same problem.

“We believe that the healthier markets such as India, Indonesia and Colombia will continue to recover slowly, helped by some structural change, a modest improvement in global trade and the ongoing global search for yield,” Maarten-Jan Bakkum, Senior Emerging markets Strategist at NN IP said.

(Adapted from CNBC)

Categories: Economy & Finance