Small investors finally have more options to invest in Indian equities after the launch of two exchange traded funds (ETFs) this year.
ETF Securities in April issued the ETFS Reliance India Nifty 50 ETF (NDIA) on the Australian Securities Exchange (ASX). NDIA aims to track the National Stock Exchange of India’s Nifty 50 index, the equivalent of Australia’s S&P/ASX 200 index. The Nifty 50 is about two-thirds of India’s stockmarket by value.
ETF Securities co-head of sales Kanish Chugh says there is a gap in the market for broad-based index exposure to India. “If you want long-term exposure to India, the best way to get it is through the Nifty 50 Index and the country’s largest and most liquid stocks.”
Chugh says some investors use NDIA to boost the India weighting within their emerging markets (EM) allocation. “They might invest 1-2 per cent of their portfolio core in NDIA to have higher exposure to India than they would get through an EM ETF.”
Other investors use NDIA tactically to take overweight positions in India.
“India is a compelling thematic for investors who want ‘portfolio satellites’ that have potential to deliver higher returns,” says Chugh. “Depending on their risk tolerance and portfolio style, they might have up to 5 per cent in India and look to maintain that exposure for at least three to five years.”
BetaShares took a different route with its India Quality ETF (IIND). Launched in August, IIND provides exposure to 30 Indian companies based on profitability, leverage and earnings stability.
IIND’s smart-beta strategy uses ranks to exploit inefficiencies in Indian equities rather than a traditional market capitalisation-weighted approach.
BetaShares CEO Alex Vynokur says a screening approach makes sense with Indian equities. “We wanted to provide investors with a low-cost way to access India, while recognising the India market is substantially less efficient than developed markets.”
BetaShares’ approach is so far working. The IIND index returned 26.4 per cent over one year to end-October 2019 versus 24.1 per cent for the Nifty 50 Index. Over three years, IIND has delivered 14.2 per annualised or just 10 basis points above the Nifty 50.
Like other ETFs, IIND and NIDA are bought and sold on the ASX like a share. Unlike most ETFs, IIND and NDIA have reasonably high fees: 80 and 85 basis points respectively.
For comparison, the actively managed Ellerston India Fund charges 1.1 per cent and has a 15 basis point performance fee over the benchmark index return.
Simply, investors can have active management in India equities for little more than the cost of ETF. Active management is important given potential emerging-markets volatility.
Still, investors would have been better off with India ETFs than actively managed India funds in the past 12 months. ETFs shine brighter in rising markets; in volatile markets, investors often wish they had professionals overseeing their capital though active funds.
The Ellerston India Fund returned 21.7 per cent over one year to end-October 2019 after fees. The Fidelity India Fund, managed out of Singapore, returned 20.1 per cent and is this market’s leading India fund by assets managed. The Fiducian India Fund delivered 15.1 per cent.
Over seven years, the Fiducian fund returned almost 17 per cent annualised, making in on the top long-term performers.
Currency risk is another issue with unhedged active and index India funds, although the Australian dollar to Indian rupee has been reasonably stable since 2015.