Global exchange traded funds (ETFs) that invest in India have little to show in terms of performance. They have done badly over the short as well as the long term.
For instance, the US-based Wisdom Tree India Earnings, one of the largest India-focussed ETFs, has posted negative returns over one-month, three-months, one-year, three-year, and five-year periods.
Wisdom Tree is not alone. Other ETFs such as PowerShares India, iPath MSCI India Index, iShares S&P BSE Sensex, and DB X-Trackers CNX Nifty have also lost money across time horizons.
In simple terms, an ETF is a fund which invests in stocks making up a country’s index (say the Nifty or the Sensex) and trades on an exchange where they are listed (say NYSE or LSE).
So, at a broad level, the returns on the ETF should mirror that of the index it tracks. But, this has not happened in the case of ETFs with an India focus.
Consider this. The Nifty is up around three per cent over the last month, around six per cent over one year, and 27 per cent over the last five years.
Yet, most global ETFs which track the Nifty are in the red, in all these time periods.
The blame for this divergence falls on the rupee’s rout. A weak currency erodes the returns of foreign currency denominated investments in India.
The rupee has lost six per cent against the US dollar over the last month, and has lost more than 15 per cent of its value in the last one year and 30 per cent of its value in the last five years.
In fact, the rupee has lost against other major global currencies such as the Euro and the British Pound too, impacting investments in these currencies as well.
But Japan-based ETFs such as Nikko CNX Nifty and Next F India CNX Nifty have managed to buck this trend. Thanks to the aggressive monetary easing in Japan, the yen has weakened against most currencies, including the rupee over the last year.
This has helped them post positive returns.
But even these funds have lost over the last three months due to the steep fall in the rupee.
But those who took the BRIC ETF route to invest in Indian equities have done better. ETFs based on the BRIC theme that invest in stocks in Brazil, Russia, India and China benefited from diversification.
For instance, iShares BRIC 50 has posted positive returns over the one-month, one-year and five-year time frames. US-based SPDR S&P BRIC 40 has also gained across most time periods. Aiding this is the appreciation of the Chinese renminbiagainst global currencies.
The renminbi has gained nearly 12 per cent against the dollar over the last five years and close to four per cent over the last year.
This served as a foil to the weakness in the Brazilian real, Russian rouble and the Indian rupee.