Analyse: Lyxor ETF MSCI India A

Der Indien-ETF mit den engsten Spreads am europäischen Markt bietet ein Investment in die 60 liquidesten indischen Aktien. 

Gordon Rose 21.12.2012

Rolle im Portfolio

The Lyxor India A ETF provides equity exposure to India. As with all single country emerging market exposures, this Lyxor ETF would be best deployed as tactical tool within a well diversified portfolio. The ETF can also be deployed as a core holding complementing exposure to emerging markets in Asia and Latin America. Increased correlation with international stock markets over the past years makes the ETF less beneficial from a diversification point of view. The index correlated 77% with the MSCI World USD Index and 87% with the MSCI EM USD Index over the last five years; up from 71% and 83% respectively over the trailing ten year period. As the correlation with China remains relatively low, the ETF might be utilised as diversifier for equity exposure to China. The index correlated 49% with the MSCI China CNY Index over the last five years.

The ETF is suitable for investors believing in a story rooted in robust domestic demand streaming from the relatively young and increasingly affluent population in India. In addition, investors overweighting China can use the ETF to diversify their exposure within the emerging market equity segment of their portfolio.

Investors should keep in mind that the Indian equity market is still lacking transparency. The country does not permit free access to its market by controlling capital on the Rupee and on foreign investment. Indian companies have structural issues as many founders or India’s long-established business families hold controlling stakes in many companies; resulting in corporate governance issues. Especially the very complex ownership structure of companies with widespread pyramiding, cross-holding and the use of non-public trusts are far from transparent. In addition, accounting rules are yet to be up to international standards. Nevertheless, transparency has improved massively over the years.

Fundamentale Analyse

In contrast to China and most developed markets, India has the benefit that its young, employable population is growing. However, the country still has a long way to go in modernizing its economy. Less than 10% of the working population is employed in a regulated job, leaving the remaining 90% without health and social insurance. With around 60% of its GDP coming from domestic sources, India is significantly more reliant on the development of its internal market than most emerging markets. In fact, domestic private consumption and investment are expected to remain the main drivers of GDP growth in the near future, although increased trade is expected to make a contribution at the margin as well. The country's large English-speaking workforce has made it a centre for the outsourcing of technology services; one of the more productive and export-oriented sectors of the economy.

India has long been one of the fastest growing economies in the world. However, the country’s GDP growth has slowed more recently. The government expects the economy to expand 5.7%-5.9% in the fiscal year ending March 2013, after forecasting a 7.6% growth rate earlier in 2012. India’s economy expanded by 6.5% in the fiscal year 2011/12 after growing by over 9.0% in the year before.

Up to now, the Reserve Bank of India hesitated to cut interest rates to boost growth on the back of a high CPI. However, inflation has remained well above the bank’s target of 5.0%, despite dropping to a 10-month low of 7.24% in November. In its most recent policy meeting, the RBI held its key interest rate unchanged at 8% for the fifth consecutive time but gave hints for rate cuts earlier next year, if inflation continues to ease. The bank also surprised market participants by keeping its cash reserve ratio at 4.25% rather than make the accommodative move of cutting it by 25 bps, as some market participants had expected. One of the key impediments to growth facing the Indian economy is rampant corruption, which can make it difficult for entrepreneurs to start new businesses or expand operations. However, in a good sign for openness, India’s government announced earlier this year that qualified foreign investors will now be able to own, in aggregate, up to 10% of an Indian company, with a 5% limit on ownership by any individual foreign investor. Previously, only institutional investors were permitted to invest directly in Indian equities. However, there is much more work to do to liberalise the Indian market as foreign investors are still not allowed to access specific sectors.

In addition, the IMF has called for India to continuously liberalise foreign investment and address controversial tax regulations in order to improve confidence amongst investors and boost capital inflows. The government recently took some of the most significant reforms since opening its economy over 20 years ago as it eased foreign investment restrictions in the retail, aviation and broadcasting industries. The most crucial reform was the decision to allow foreign investment in multibrand retail . It also encouraged overseas investment in insurance and opened up the pension sector. Such steps could boost India’s medium-term growth prospects.

Indexkonstruktion

The MSCI India INR index includes about 60 of the largest and most liquid stocks of publicly-traded companies trading on the National Stock Exchange of India. The index aims to hold 85% of the market capitalisation of each industry. The securities are weighed by free-float adjusted market capitalisation. Because closely held firms will have a smaller piece of their aggregate market capitalisation floated on public exchanges, the free float adjustment serves to ensure the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The index is reviewed four times a year. The index is very top-heavy, with about 50% of its total value comprised by the top ten constituents. The index also has a significant degree of sector concentration. Its three largest sector weightings are finance (28%), IT (15%), and energy (13%).

Fondskonstruktion

This ETF uses synthetic replication method to track the performance of the MSCI India total return index. To achieve this performance, the fund holds a basket of blue chip shares and enters an un-funded swap agreement with parent bank Societe Generale. The bank then gives away the performance of the MSCI India (net of fees) 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 NAV 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 -2% and 0%), which would mean in this case that the fund owes the counterparty money. The fund’s holdings consist of highly liquid equities from OECD countries, the large majority of which are European. Lyxor does not engage in securities lending within the fund, which helps to minimise overall counterparty risk.

Gebühren

Lyxor charges a 0.85% total expense ratio (TER) for the ETF. This lies in the upper range of ETFs tracking Indian equities. Other potential costs associated with holding this fund which are not included in the TER include swap costs, bid-ask spreads and brokerage fees.

Alternativen

As of writing there are a few ETFs offering equity exposure to India. Most of the indices are tracking either the MSCI India Index or the S&P CNX Nifty Index. The largest alternative in terms of total assets under management is the swap-based db x-trackers S&P CNX NIFTY ETF. The S&P CNX NIFTY Index is a free-float-adjusted market capitalisation index, representing about 60% of the NSE. Therefore, the db x-trackers ETF represents a slightly smaller share of the Indian economy. Investors interested in a more like-for-like alternative will find the Amundi ETF MSCI India, tracking the same index as the ETF discussed here. The Amundi ETF is available in USD and EUR and also uses synthetic replication and levies a TER of 0.80%.

 

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Über den Autor

Gordon Rose  ist ETF-Analyst bei Morningstar.