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Update: Lyxor UCITS ETF MSCI India C-USD (USD)

Im Zuge der fulminanten Kurssteigerungen an der Börse in Indien ist der Markt inzwischen hoch bewertet. Angesichts der Überlegenheit vieler aktiver Ansätze dürfte dieser ETF am ehesten für ein taktisches Kurzfrist-Engagement geeignet sein.

Monika Dutt 22.09.2016

Rolle im Portfolio

This exchange-traded fund provides exposure to India's largest equities. As with all single-country emerging-markets ETFs, Lyxor MSCI India would be best deployed as a tactical tool within a well-diversified portfolio. 

Investors should keep in mind that India imposes fairly tight controls on currency flows as well as on foreign ownership of enterprises. Besides, from a legal standpoint, despite improvements over the past years, the Indian corporate sector still suffers from a distinct lack of transparency, and accounting rules are not yet up to international standards.

In less efficient markets, such as the case here, there could be scope for experienced active managers to add some value over a standard large-cap benchmark. For example, within the India equity Morningstar Category, actively managed funds have on average outperformed and shown lower volatility than passive peers during the past three- and five-year periods. In fact, this ETF's risk-adjusted returns have consistently ranked at the bottom of the fourth quartile. Longer comparisons are not possible, as India ETFs launched only a few years ago.

We acknowledge that these time periods are short and the passive fund peer group is small. However, if these early signs are anything to go by, one may be tempted to argue that a standard cap-weighted passive approach may not be the best option for India equity exposure.

With an ongoing charge of 0.85%, the fund is at the high end of the range compared with other ETFs with exposure to the Indian equity market. During the past three years, the tracking difference shows that the total annual holding cost can be higher than the ongoing charge. 

All factors considered, the ETF does not come across as an interesting investment opportunity to gain exposure to this market at this stage.

Fundamentale Analyse

The Indian equity market, as measured by the MSCI India Index, in US dollars, has outperformed the broader MSCI Emerging Markets Index by 2.27% on an annualised basis for the past 10 years for the period ended July 2016.

India's young demographic profile and economy fuelled by entrepreneurship and bottom-up innovation make Indian equities a particularly attractive investing proposition in comparison with other emerging economies. Over 65% of the population is under 35 years old, and large segments of the population are well educated and speak English.

Investor sentiment on India continues to be quite positive. Prime Minister Narendra Modi has made some progress on his reform agenda, which includes raising limits on foreign ownership in areas such as the insurance industry and proposing a new centralised business tax code that would greatly simplify a current patchwork structure that is controlled at the provincial level.

India also has benefited recently from lower oil prices. The country is a net importer of oil, so it has seen a decline in its current account deficit, as well as inflation. That, in turn, has allowed the Reserve Bank of India to adopt a more accommodative monetary policy to support economic growth. And relative to its emerging-markets peers, India's outlook is better. While China's economy slows and Brazil is in recession, the International Monetary Fund estimates a healthy 7.5% growth rate for India in 2016 and 2017. That said, any upturn in oil prices would be a significant headwind for economic growth and could quickly deflate the country's equity markets.

Despite its overall positive macroeconomic outlook, investors should be aware that India equities are very volatile. India depends heavily on foreign fund flows for investment and growth. When markets are in a risk-off mode or investors become concerned about the pace of reforms or the economy’s fundamentals, foreign funds quickly flow out of Indian equities, which can quickly drive down share prices. These factors also drive volatility in the Indian rupee and, therefore, the returns of India equity funds. These funds do not hedge their foreign-currency exposure, so their returns reflect both the change in value of the underlying assets as well as the change in the Indian rupee against the US dollar.

Indexkonstruktion

The MSCI Daily TR Net Emerging Markets India USD Index tracks the performance of the large- and mid-capitalisation segments of the Indian market, covering approximately 85% of the local universe. The securities are ranked by both their size and liquidity and are selected for inclusion based on a combination of those two factors. The constituent ranking is on a free float-adjusted market-capitalisation-weighted basis. In terms of sector exposure, the index achieves relatively strong sector diversification, despite the small number of constituents. Information technology (18% to 24% of the index's value) is the biggest allocation, followed by financials (16%-20%) and consumer discretionary (12%-16%). The index is top-heavy, with the top 10 constituents representing approximately 50% of the index's value. Among these, we find Infosys, an information technology services company (10%-12%), Housing Dev Finance Corp, the first mortgage company in India (10%-12%), and Reliance Industries, an energy conglomerate (5%-7%).

Fondskonstruktion

This ETF uses synthetic replication to track the performance of the MSCI India NR USD Index. To achieve this performance, the fund holds a basket of blue-chip shares and enters an unfunded swap agreement with parent bank Societe Generale. The bank then gives away the performance of the MSCI India Index (net of a swap spread) in exchange for the performance of the fund's holdings. According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund's net asset value at any point in time. However, Lyxor has a daily target of zero swap exposure. Swaps are reset whenever their value becomes positive. They may sometimes have a negative value (between negative 2% and 0%), which would mean in this case that the fund owes the counterparty money. The ETF substitute basket holdings consist of highly liquid equities from the Organization for Economic Cooperation and Development countries. Lyxor does not engage in securities lending within the fund, which helps to minimise overall counterparty risk.

Gebühren

This fund's ongoing charge of 0.85% falls in the upper range of ETFs tracking the Indian stock market. The analysis of the annualised tracking difference (fund return less index return) for each of the past three years (for the period ended July 2016) has ranged between negative 1.13% and 1.89%, indicating that the total annual holding cost can be higher than the ongoing charge. Other potential costs associated with holding this fund that are not included in the ongoing charge include swap spreads, bid-ask spreads, and brokerage fees.

Alternativen

There are only four ETFs listed on European exchanges offering equity exposure to India. Most of them track either the MSCI India Index or the S&P CNX Nifty Index. This ETF is the largest in terms of total assets under management (EUR 1.2 billion), but the largest alternative is the Amundi MSCI India EUR A/I ETF, which levies a slightly lower ongoing charge of 0.80%.

Db x-trackers offers two ETFs, the db x-trackers MSCI India 1C (synthetic; 0.75%) and the db x-trackers Nifty 50 1C (synthetic; 0.85%), which tracks the CNX Nifty Index and therefore represents a slightly smaller share of the Indian economy compared with the Lyxor fund.

 

Über den Autor

Monika Dutt  E' Analista sulle strategie passive di Morningstar Europe