Etfs In India: Worth Investing Or Not?

India's population is the largest in the world, and its economy is growing. This has led to a surge in the country's stock market, with the Morningstar India Index outperforming the EM Index. Exchange-traded funds (ETFs) are a cost-effective way to invest in foreign securities, and India equity ETFs have received new net inflows of US$1.4 billion, making them the best non-US equity category by subscription. India ETFs have been riding high, with the First Trust India Nifty 50 Equal Weight ETF up about 17% this year, while the iShares MSCI India ETF has advanced about 11.8%. The iShares MSCI India Small-Cap ETF has returned 22.8% in US dollar terms. The Franklin FTSE India ETF has the lowest expense ratio, while the Columbia India Consumer ETF has the best 1-year performance, and the iShares MSCI India ETF offers the best liquidity.

What are the best-performing ETFs in India?

Exchange-Traded Funds (ETFs) are a popular investment vehicle in India, providing investors with a balanced approach that combines the benefits of mutual funds and stocks. When considering the best-performing ETFs in India, it is essential to look at their historical performance, expense ratios, and the level of diversification they offer. Here is a list of some of the top-performing ETFs in India based on various sources:

Best-Performing ETFs in India:

• Mirae Asset NYSE FANG+ ETF: This ETF aims to mirror the NYSE FANG+ Index, which includes top technology and tech-enabled firms like Facebook, Apple, Amazon, Netflix, and Google. It offers investors exposure to the growth potential of leading global tech giants.
• Motilal Oswal NASDAQ 100 ETF: This ETF provides investors with access to 100 of the largest non-financial companies listed on the NASDAQ stock market, including well-known tech companies.
• UTI Nifty 50 Exchange Traded Fund: This ETF tracks the Nifty 50 index, which comprises the top 50 companies listed on the National Stock Exchange (NSE) of India. It offers broad market exposure and diversification across various sectors of the Indian economy.
• ICICI Prudential Nifty50 Value 20 ETF: This ETF focuses on investing in stocks trading at a discount to their intrinsic value, following a value investing strategy. It aims to identify undervalued stocks with potential for long-term capital appreciation.
• Mirae Asset S&P 500 Top 50 ETF: This ETF provides exposure to the top 50 companies in the S&P 500 Index, which is a benchmark index for the US stock market. It offers investors a way to gain access to some of the largest and most established US companies.
• ICICI Prudential Nifty 100 Low Vol 30 ETF: This ETF invests in stocks with lower volatility, providing investors with more stability and potentially reducing downside risk. It focuses on companies that exhibit lower price fluctuations than the overall market.
• HDFC Nifty PSU Bank ETF: This ETF focuses on investing in public sector banks in India, providing exposure to the banking industry, which is a significant contributor to the country's economy.
• Nippon India ETF PSU Bank BeES: Similar to the HDFC Nifty PSU Bank ETF, this ETF tracks the Nifty PSU Bank Index, offering exposure to stocks of public sector banks in India. It provides potential diversification benefits across the PSU banking sector.
• ICICI Prudential Mutual Fund - BHARAT 22 ETF: The BHARAT 22 ETF offers a diversified portfolio of blue-chip stocks from key sectors of the Indian economy. It provides exposure to well-established companies with strong growth potential, along with the benefits of diversification and liquidity.
• ICICI Prudential Nifty Midcap 150 ETF: This ETF focuses on mid-cap companies, which have higher growth potential than large-cap stocks but lower than small-cap stocks. Mid-cap stocks are known for delivering attractive long-term returns.
• Nippon India ETF Nifty 50 BeES: This ETF also tracks the Nifty 50 index, providing exposure to a diversified portfolio of blue-chip companies across various sectors of the Indian economy. It is one of the most popular choices for broad market exposure.
• HDFC Nifty100 Low Volatility 30 ETF: This ETF aims to reduce risk by investing in stocks with lower price volatility compared to the broader market. It is suitable for investors seeking a more defensive investment strategy.
• Nippon India ETF Gold BeES: This ETF is backed by physical gold, offering investors exposure to gold price movements without the need for physical ownership. Gold is considered a safe-haven asset and a hedge against inflation.
• Invesco India Gold ETF: This ETF aims to track the price of gold in India, providing investors with exposure to gold's performance without the need for physical ownership. It offers liquidity and potential for capital appreciation.
• Nippon India Silver ETF: This ETF is backed by physical silver, providing investors with exposure to silver price movements. Silver is a valuable industrial and precious metal.
• Bharat Bond ETF - April 2030 and April 2031: These ETFs offer exposure to a diversified portfolio of high-quality bonds with fixed maturity dates. They are cost-effective, tax-efficient, and provide stability and income generation.

These ETFs provide diverse investment opportunities across sectors such as banking, technology, gold, and bonds, catering to different risk profiles and financial goals. It is important for investors to carefully consider their investment objectives, risk tolerance, and the performance of these ETFs before making any investment decisions.

What are the risks of investing in Indian ETFs?

When considering investing in Indian ETFs, it is essential to be aware of the potential risks involved. Here are some key points to keep in mind:

Currency Risk and Depreciation

The Indian Rupee has historically lost value against major currencies like the US Dollar. This depreciation can impact your investment returns, especially if you are a foreign investor. The rupee's performance can affect the overall profitability of your ETF investments.

Political and Economic Stability

India's political and economic landscape can influence the success of your ETF investments. Social and economic instability, conflicts, or natural disasters can all impact the country's economy and the performance of Indian stocks.

Sector-Specific Risks

Some Indian ETFs focus on specific sectors or industries, such as technology or real estate. Investing in these sector-specific ETFs increases your exposure to the performance of that particular sector. Cyclical factors, market changes, and regulatory shifts can impact the returns on these investments.

Tax Implications

Tax efficiency is a crucial consideration when investing in ETFs. International ETFs, actively managed ETFs, and those using derivatives or investing in commodities can have varying tax implications. Consult a tax advisor to understand the tax consequences before investing.

Liquidity and Trading Volume

Some Indian ETFs may have low trading volumes and liquidity issues. This can impact your ability to buy or sell shares at desired prices and may result in larger bid-ask spreads, affecting your overall investment returns.

Tracking Errors

Tracking errors refer to the difference between the returns of an ETF and its underlying benchmark index. While usually small, tracking errors can sometimes be significant and impact your investment performance. It is essential to research the historical tracking errors of Indian ETFs before investing.

Counterparty Risk

When ETFs use derivatives such as futures or options, there is a risk of counterparty default. This can negatively affect the ETF's performance and the value of its assets.

Interest Rate Sensitivity

ETFs focusing on dividend or bond investments can be sensitive to changes in interest rates. Rising interest rates can lead to lower bond prices and impact the value of bond ETFs. Changes in dividend payments from underlying stocks can also affect dividend-focused ETFs.

Leveraged and Inverse ETFs

Leveraged and inverse ETFs are designed for short-term trading and can amplify market movements. They are riskier and may not be suitable for long-term investors. These ETFs can lead to substantial losses if they do not perform as expected.

Overlapping Sector Exposure

Overlapping sector exposure occurs when multiple ETFs within a portfolio have significant positions in the same sectors. This lack of diversification can increase risk, as a downturn in a specific sector can have a more significant impact on the overall portfolio.

What are the cheapest India ETFs?

When considering the cheapest India ETFs by total expense ratio (TER), the following funds are often mentioned:

• Franklin FTSE India UCITS ETF
• Xtrackers MSCI India Swap UCITS ETF 1C
• IShares MSCI India UCITS ETF USD (Acc)

The total expense ratio (TER) of ETFs on Indian indices is between 0.19% p.a. and 0.85% p.a. The cheapest India ETFs tend to have a TER at the lower end of this range.

It is worth noting that there are alternative indices on India with a sector or thematic focus, such as the INQQ The India Internet ESG Screened index and the S&P India Tech index. The TER of ETFs on these alternative indices is between 0.65% p.a. and 0.86% p.a.

In addition to ETFs that focus specifically on India, some sources suggest considering broader emerging markets indices or Asia indices that include a share of Indian stocks. These ETFs tend to have a TER between 0.12% p.a. and 0.66% p.a.

What are the most liquid Indian ETFs?

When considering the liquidity of an ETF, it is important to monitor the liquidity of the fund itself and the liquidity of the shares being tracked. The liquidity of an ETF will be tested in situations of market decline, and it is important to ensure that you are able to exit when you want to.

The most liquid Indian ETF is the iShares MSCI India ETF (INDA). This fund has a 30-day average daily volume of 2,042,496 and $4.94 billion in assets under management. INDA tracks the MSCI India Index, which primarily consists of large- and mid-cap companies trading on the National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange (BSE).

Other Indian ETFs with high liquidity include:

• Franklin FTSE India ETF (FLIN): This ETF has a 30-day average daily volume of 170,341 and $204.46 million in assets under management.
• Columbia India Consumer ETF (INCO): This ETF has a 30-day average daily volume of 12,757 and $90.49 million in assets under management.

What are the best India ETFs for 2023?

India's economy is growing, and its population is booming, so it's no surprise that investors are looking to the country as an attractive prospect. India-based equities have underperformed the S&P 500 in the past year, but there are still some good options for investors.

Best India ETFs for 2023

Franklin FTSE India ETF (FLIN)

With an expense ratio of just 0.19%, this ETF has the lowest fees of the India funds. It tracks the FTSE India RIC Capped Index, which measures the performance of large- and mid-cap Indian stocks. Its top holdings include Reliance Industries Ltd., Housing Development Finance Corporation Ltd., and Infosys Ltd.

Columbia India Consumer ETF (INCO)

The best 1-year performance of the India ETFs, with a return of 19.12%. It targets the Indxx India Consumer Index, which focuses on consumer industries in India, including autos, food products, and media. Its top holdings include Tata Motors Ltd., Titan Company Ltd., and Nestle India Ltd.

IShares MSCI India ETF (INDA)

The most liquid of the India ETFs, with a 1-year return of 10.8%. It has an expense ratio of 0.64% and an annual dividend yield of 0.38%. INDA tracks the MSCI India Index, which consists of large- and mid-cap companies trading on the NSE and BSE. Its top holdings include Reliance Industries Ltd., ICICI Bank Ltd., and Housing Development Finance Corporation Ltd.

IShares MSCI India Small-Cap ETF

This fund seeks to track the performance of the MSCI India Small Cap Index and will invest at least 80% of its assets in small-cap Indian companies.

VanEck India Growth Ldrs ETF

This ETF seeks to replicate the price and yield performance of the MarketGrader India All-Cap Index, which is designed to track the overall performance of Indian equities.

WisdomTree India Earnings ETF

This fund seeks to track the performance of the WisdomTree India Earnings Index, which is a dividend-weighted index of Indian stocks.

Other Options

There are a few other India-specific ETFs, including the WisdomTree India Hedged Equity, Global X India Active ETF, and Nifty India Financials ETF. Additionally, investors can consider broader emerging market ETFs, which often have a significant allocation to India.

Frequently asked questions