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© Kshitij Anand
Global investing: US-listed ETFs versus rupee denominated ETFs in India

The interest in investing in the US stock market has surged in India. The US markets have significantly outperformed the Indian markets in the last decade.

Their resilience in the current pandemic has made Indian investors take notice and start diversifying their portfolio beyond the country’s shores.

But, we’ve seen international investment opportunities available in India. So why bother investing overseas directly? Our team analysed two trackers of the Nasdaq 100 Index – one listed in India and the other in the US.

Although, the India-listed ETF was launched in 2011, its AUM grew significantly only this year to over USD 200 million.

On the other hand, the US-listed ETF has been around for over two decades and is an extremely liquid ETF with over USD 128 billion in assets under management. Here’s a quick overview comparing them to their underlying index.

What is the Nasdaq 100 Index?

The Nasdaq 100® Index consists of 100 of the largest national and international non-finance companies listed on the Nasdaq Stock Exchange, based on market cap.

The index is heavily inclined towards large-cap tech companies and is often looked upon as a proxy to the tech sector’s performance. It offers a great combination of large-cap, growth, and tech exposure with high liquidity

Investing in Indian ETF or the Direct US ETF

An Indian Rupee denominated ETF would have been an obvious choice for Indian investors until recently. High costs and difficulties associated with overseas investment presented a substantial entry barrier.

However, growing awareness about the Liberalized Remittance Scheme and the emergence of platforms that offer quick access to the US markets at lower costs have considerably cut down these barriers.

Here is a comparison of the two:

1. NAV versus Price

Like mutual funds, ETFs have an End-of-day NAV but are also priced intra-day for trading on the markets. An ETF’s market price is that at which the ETF can be purchased or sold during the trading period.

The NAV of an ETF is the value of the fund derived using the market price of the underlying securities at the end of the day and is published after some delay after the close of the market.

Due to a variety of factors (liquidity, market movements, listing location time differences), the last traded price of an ETF can be at either premium or discount to its daily NAV.

The price is provided by the market participants based on their estimation of the various factors. When the last traded price is higher than the NAV, the ETF traded at a ‘premium’. On the other hand, if the last traded price is lower, then it traded at a ‘discount’.

The India-listed ETF has seen significant price differences between the trade price and NAV, especially during extreme volatility periods. This is primarily because of the lower liquidity and the time difference between India and the US, where the live markets are.

The proxy for trading alternatively are the futures. In 2016, for example, the fund saw premiums as high as 17%. Thus, an investor may have paid 17% higher than the value for buying the ETF.

On the other hand, the US-listed ETF has little divergence from the benchmark. The premium/discount to Nasdaq-100 has been less than 0.03 percent for most of the trading days. The fund’s massive liquidity, the ETF, helps handle periods of extreme volatility relatively well.

One of the main reasons behind such low divergence is that the US-listed ETF’s market-makers can track the market prices in real-time and adjust the bid-ask to reduce arbitrage. Greater liquidity and many more market-makers reduce the premium/discount.

2. Performance

One must normalize both the ETFs to the same currency and also consider the dividend yield. The India-listed ETF reinvests the dividends, whereas the US one pays out cash dividends. A quick INR-denominated comparison revealed an underperformance of approximately 15% over the last 5 years.

3. Annual Fee or Expense Ratio

The expense ratio of the India listed fund is 0.54% vs just 0.20% for the US-listed ETF. This can add up over a period of time. The Indian ETF is more than twice as expensive.

4. Other Factors

One must consider an additional 0.5% to 1.5% fees (depending upon the bank) while investing in the US-listed ETFs to convert your INR to USD.

Conclusion:

Domestic ETFs help provides access to the US markets, very easily – one doesn’t need to consider the USD 250k limit and all the investments are denominated in INR.

However, to reduce many of the costs and gain access to a much larger universe, accessing the US-listed ETFs may make more sense.

Additionally, one doesn’t need to always wait for the India listing of the same ETF and thus investors can very easily access the US markets.

(Swastik Nigam is Founder and CEO of Winvesta)

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.