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First for Indian ETF as it makes its international debut

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

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

"We are making it easier for global investors to access Indian markets," Sanjay Sachdev, executive chairman at ZyFin told CNBC via phone. "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."

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


A man counts Indian rupee banknotes for a photograph near the Bombay Stock Exchange (BSE) building in Mumbai, India.
Dhiraj Singh | Bloomberg | Getty Images
A man counts Indian rupee banknotes for a photograph near the Bombay Stock Exchange (BSE) building in Mumbai, India.

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

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

"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.

The Indian economy has been growing at a rate of 6.4 percent year-on-year, 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.

But the risks with the Indian economy continue to concern investors. While the ETF follows a benchmark that has a history of outperforming MSCI India and MSCI Emerging Markets index for over 16 years, concerns over the performance of the Indian rupee, political stability, lower rates and its impact on corporate earnings loom.

Since the fund and the underlying index do not hedge the currency risk, any depreciation of Indian rupee against the dollar will hit the fund's returns.

Strong dollar vs. EM currencies

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

While the Indian economy has come a long way since then with better growth, domestic reforms and a fairly stable currency, the volatility in the U.S. dollar is still a worry. That holds true for a number of other emerging markets such as Indonesia, Mexico and South Korea.

"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 told CNBC via email.


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