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Low-cost access to India's growth story

db X-trackers MSCI India Index UCITS ETF is a low-cost way to access what looks like a good growth story.
October 23, 2014

After a period of stagnation due to inflation, a run on the rupee and emerging market outflows, India's stock market seems to have bounced back, as we recently explained in our report on the world's best growth markets. This year, India elected a government with an outright majority, rather than the coalitions of the past few decades which have found it hard to come to agreements, holding back reforms.

IC TIP: Buy
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Good prospects for Indian equities
  • Good economic prospects
  • Low cost
  • Secure structure
Bear points
  • Emerging markets risk
  • Market already up

The current government has indicated that it is business friendly and wants to address the problems that have obstructed economic growth, and professional investors such as Kunal Desai, manager of Neptune India Fund (GB00B1L6DT30), think the Indian equity market has the potential to thrive in the years ahead.

The International Monetary Fund (IMF) has raised its 2014 gross domestic product (GDP) forecast for India from 5.4 per cent to 5.6 per cent, and forecasts 6.4 per cent growth in 2015. The recent fall in the oil price should also help the Indian economy.

"The Indian stock market as a whole is likely to be buoyed in the near term by renewed interest from domestic investors for whom the appeal of gold and property has waned as the precious metal's price has dropped and house price growth has eased," adds Avinash Vazirani, manager of the Jupiter India Fund (GB00B2NHJ040).

When a market is benefiting from a general upward trend passive funds come into their own, as making a gain will not necessarily rely on selecting or avoiding certain shares. Passive funds such as exchange traded funds (ETFs) are also much cheaper and so the costs will eat into less of your gains.

IC Top 50 ETF db X-trackers MSCI India Index UCITS ETF (XCX5) aims to track the MSCI India TRN Index, which includes the shares of large and mid-cap companies with a market capitalisation within the top 85 per cent of the Indian stock market. The index comprises 67 shares.

The fund has a 0.75 per cent all-in fee, making it the cheapest India ETF listed in London and much cheaper than actively managed India funds.

 

 

db X-trackers MSCI India Index UCITS ETF tracks its index via a swap rather than buying the shares in the index. The swap counterparty, Deutsche Bank, pays the ETF the return of the index in exchange for the returns of a basket of securities the ETF holds. This adds in the risk that the counterparty may not be willing or able to fulfil its obligation. However, the basket of collateral the ETF holds is worth at least the value of the assets, so it could use this to compensate investors. The collateral is largely comprised of developed market equities.

Since the fund's inception in June 2010, it has delivered 7.39 per cent against 11.85 per cent for its benchmark index. Although this tracking difference seems wide it is comparable with the divergences from the benchmark of the other India ETFs listed in London. Charges on an ETF will eat into performance over time.

XCX5 is not suitable for income seekers as dividends are reinvested. The fund's currency is US dollars, so even if investors buy the sterling share class they still face currency risk.

Emerging markets can be more volatile than developed markets, and Indian equities are not immune to global trends. The Indian market has also already risen in response to changes so, although it looks as though it will go further, it is not as cheap as it was.

However, if you have a high risk appetite and long-term investment horizon, then db X-trackers MSCI India Index UCITS ETF is a low-cost way to access what appears be a promising growth story. Buy.

 

DB X-TRACKERS MSCI INDIA INDEX UCITS ETF 1C (XCX5)

PRICE1024pBASE CURRENCYUS dollars
SIZE OF FUND$97.28mTOTAL EXPENSE RATIO0.75%
LAUNCH DATE24/06/2010YIELD0%
INDEXMSCI INDIA TRN INDEXMORE DETAILS www.dbxtrackers.com
REPLICATION METHODFully collateralised swap*

Source: Morningstar, *Deutsche Bank.

 

1 year performance (%)Performance since launch (%)
db X-trackers MSCI India Index UCITS ETF 36.17.39
MSCI INDIA TRN INDEX37.6111.85

Source: Deutsche Bank as at 30 September 2014

 

Top 10 index constituents as at 30 September 2014 (%)

Infosys 10.03
Housing Development Finance Corporation8.9
Tata Consultancy Services7.58
Reliance Industries 7.02
ITC4.75
Sun Pharmaceutical Industries 3.53
Hindustan Unilever 3.29
Mahindra & Mahindra2.73
Larsen & Toubro 2.7
HCL Technologies2.43

 

Sector breakdown (%)

Information Technology22.98
Financials18.09
Energy11.73
Consumer Staples11.44
Healthcare9.36
Materials7.33
Consumer Discretionary6.76
Industrials5.45
Utilities3.95
Telecommunication Services2.91