India ETF: What It Is, Example, Benefits

What Is an India ETF?

An India exchange-traded fund (ETF) is a financial instrument designed to track the performance of a basket of securities listed on a stock exchange in India. An India ETF may mirror the returns of a major index, group of sectors, or different cap sizes, providing investors with broad exposure to the burgeoning Indian economy, or a segment of it, through a diversified asset. 

There are quite a few exchanges operating in India, with the most popular being the National Stock Exchange of India (NSE). The NSE, one of the biggest in the world in terms of transactions, provides access to the most widely traded stocks in India, as well as different indexes for ETFs to track, including the NIFTY 50 — a collection of the largest, most liquid securities listed in the country.

Understanding an India ETF

India is one of the most sought-after markets for investors, although investing in the country isn’t particularly easy. Stock picking there is a difficult task reserved for those with a decent knowledge of domestic companies, local dynamics, and a sizable appetite for risk. It’s also fraught with problems: Investing directly in India requires overcoming challenging regulatory hurdles, while taking the offshore route by purchasing global and American depository receipts (ADRs) comes with a series of unfavorable legal and tax implications.

That leaves ETFs as arguably the best way to tap into India. These low-cost vehicles are listed on exchanges, trade throughout the day just like ordinary stock, and are usually passively managed, meaning that they aim to replicate the performance of a broad equity market or specific sector or trend, rather than handpick individual winners, by mirroring the holdings of a designated index—a hypothetical portfolio of securities representing a particular market or a segment of it.

As of December 2023, there are 14 ETFs invested in Indian equities, according to VettaFi. A large portion of them track the MSCI India or the NIFTY 50, indices with a big company bias. Others focus on more niche areas, such as small-caps, consumer stocks, and ex-state-owned enterprises.

Investors can also get exposure to India through emerging market funds and BRIC ETFs, both of which tend to feature a high percentage of the country’s equities.

Example of an Indian ETF

With assets under management (AUM) of $7 billion as of December 2023, the iShares MSCI India ETF (INDA) is by far the biggest ETF operating in India. INDA aims to provide a similar return to the MSCI India Index, whose 122 constituents represent roughly 85% of the Indian stock market.

The fund tilts toward financials and carries an expense ratio of 0.64%. Multinational energy conglomerate Reliance Industries Limited (RELIANCE.NS) commands the top individual stock allocation with a weighting of 7.8%.

Benefits of an India ETF

India houses 18% of the global population, has the third-largest purchasing power parity (PPP) in the world and, alongside China, is on course to surpass the U.S. as the biggest economy on the planet. Those characteristics and prospects present plenty of opportunities for domestic-based companies to capitalize on and potentially mouth-watering returns for investors with stakes in them.

All signs point to yet more high single-digit gross domestic product (GDP) growth for multiple years to come. Experts expect greater adoption of electronic payment platforms, growth of a middle-income group, and increased consumer spending to strengthen the already booming economy and, by extension, its stock market.

Over the next decade, pundits are confident that financials, consumer discretionary and technology sectors, in particular, will support above-average returns. That bodes well for the performance of India ETFs.

Criticism of an India ETF

India’s liberal economic policies and longstanding parliamentary democracy mean it is widely considered to be a safer investment destination than any of its neighboring regions. It is still an emerging market play, though, and thus carries a higher risk than more mature markets. Potential rewards are huge, but so too are the chances of posting heavy losses.

After Narendra Modi became Prime Minister in 2014, India underwent a number of ambitious programs, including demonetization, implementing a goods and services tax (GST), and corporate deleveraging, each of which could have contributed to an economic slowdown.

In addition, the nation faces an uphill battle in transitioning from an emerging market to a developed economy. The country must improve the economy, but also public policy, international relations, human rights, and basic infrastructure. Failure to address each segment could result in a withdrawal of foreign investors, a slowdown in economic growth, and drawdowns in the stock market. 

It’s also worth bearing in mind that any returns generated from these vehicles could be whittled down by steeper than usual fees. International investments encounter increased exchange costs and brokerage fees, meaning that ETFs catering to the Indian market charge higher expense ratios than most domestic funds.

Special Considerations

Currency Risk

Plenty of investors underestimate the effects that currency fluctuations can have on total returns. When you hold a stake in an offshore business you are also betting on its currency as well.

Unfortunately, the Indian rupee has underperformed against other major global currencies over the past few decades. A weak currency boosts the country’s exporting ambitions, helping Indian companies to sell goods internationally. It also eats into overseas investors’ returns.

Many India ETFs are traded in U.S. dollars. They are still, however, exposed to the currency risk of their underlying securities.

During periods of dollar strength and rupee depreciation, it might be sensible to explore investing in an ETF that hedges out currency risk. The goal of these vehicles is to give investors a return closer to the local-currency returns of a country’s stock-market indices.