Global ETFs Explained for Indian Investors

Global Exchange-Traded Funds (ETFs) allow investors to participate in international markets by tracking global indices or assets. For Indian investors, these ETFs offer an opportunity to gain diversified exposure across countries and sectors. This article explains how global ETFs function, ways to invest in them from India, and key considerations before including them in a portfolio.

An Exchange-Traded Fund (ETF) is a pooled investment vehicle traded on stock exchanges. ETFs commonly track an index, sector, commodity, or a basket of assets.

Global ETFs are a category of ETFs that invest in securities from multiple countries or specific international markets, as opposed to domestic ETFs which focus only on a single country’s equities. These ETFs provide exposure to foreign markets such as the US, Europe, emerging markets, or a global index like the MSCI World Index.

The underlying assets of global ETFs may include equities, bonds, commodities, or a combination, providing varied access to international financial markets.

Global ETFs offer investors exposure to international markets and can introduce unique characteristics to a portfolio. Understanding these traits helps in making informed investment decisions.

1. Geographic Diversification
   

   • Investments are distributed across multiple countries, reducing concentration in a single market.
     

   • This can help balance country-specific risks and provide access to global opportunities.
     

2. Access to Growth Markets
   

   • Global ETFs may track indices from both developed and emerging markets.
     

   • However, returns may vary depending on regional economic conditions and market performance.
     

3. Currency Diversification
   

   • Since global ETFs are exposed to multiple currencies, exchange-rate movements can affect returns.
     

   • While this adds diversification, it does not fully eliminate currency risk.
     

4. Cost Efficiency
   

   • ETFs often have expense ratios that differ from traditional mutual funds.
     

   • This can influence overall investment costs depending on the chosen ETF.
     

5. Liquidity
   

   • Like stocks, ETFs are traded on exchanges, allowing intraday buying and selling.
     

   • Liquidity levels may differ across ETFs based on trading volumes and market demand.

These characteristics make global ETFs a versatile vehicle, offering diversification and international exposure—though outcomes depend on market performance, currency fluctuations, and investor objectives.

Global ETFs provide an opportunity to diversify portfolios internationally, offering exposure to various economies, sectors, and investment themes.

They may be suitable for:

• Long-term investors looking to diversify beyond domestic markets and participate in global economic growth.
  

• Individuals seeking sectoral or thematic exposure, such as technology, healthcare, or energy, through international indices.
  

• Investors aiming to balance risk by spreading assets across countries and currencies, reducing the impact of local market volatility.
  

• Those exploring cost-efficient and transparent global investing, as ETFs often have lower expense ratios compared to some other cross-border investment options.

Global ETFs are an effective tool for investors seeking diversified, convenient, and long-term exposure to international markets while managing risk across geographies.

Indian investors have several methods for accessing global ETFs, generally categorised into direct and indirect approaches.

Direct Investment Methods

• Overseas Brokerage Accounts: Investors can open accounts with international brokers to buy global ETFs listed on exchanges such as NYSE or NASDAQ.

• Regulatory Requirements: Investments abroad are regulated under the Liberalised Remittance Scheme (LRS) by the Reserve Bank of India, allowing residents to remit up to USD 250,000 per year for investment and other purposes.

• Considerations: Understanding foreign brokerage fees, currency conversion costs, tax implications, and legal compliance can be relevant for direct overseas investments.

Indirect Investment Methods

• Indian ETFs Tracking Global Indices: Some Indian-listed ETFs track global indices or invest in foreign ETFs, which can provide access without requiring an overseas brokerage account.

• Mutual Funds and Fund-of-Funds: Certain mutual funds invest in international ETFs or global stocks, facilitating indirect exposure for Indian investors.

• Advantages and Limitations: These methods may reduce certain regulatory considerations and currency exposures, but they can incur additional fund management fees.

Note: Before investing, compliance with all applicable regulatory guidelines, including those from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), is required.

Prior to considering global ETFs for a portfolio, an evaluation of the following factors is relevant:

• Currency Risk: Foreign exchange rate fluctuations may influence returns.
  

• Expense Ratios: Comparison of fees charged by different ETFs to ascertain cost implications.

• Liquidity: Assessment of an ETF's trading volume to determine its liquidity for transactions.

• Tax Implications: Understand the tax treatment of foreign dividends and capital gains in India.
  

• Geopolitical Risks: Understanding political and economic events in target countries that may influence investments.

An evaluation of these factors contributes to decision-making processes regarding investment choices and risk management.

• Global Diversification-Spread investment risk across international markets

• Access to Foreign Sectors - Invest in global industries and themes

• Cost-Effective- Lower expense ratios compared to mutual funds

• High Liquidity- Easy to buy and sell on stock exchanges

• Growth Potential-Tap into developed and emerging market opportunities

• Hedge Against Domestic Volatility- Balance country-specific risks

While global ETFs offer exposure across various markets, certain risks are associated with these investments:

• Market Volatility: Foreign markets may exhibit different levels of volatility compared to domestic markets.

• Geopolitical Risks: Political instability, regulatory changes, or trade tensions may influence investments.

• Currency Risk: Currency depreciation may result in lower returns when converted to Indian Rupees.
  

• Regulatory Risks: Changes in foreign investment regulations and tax laws can influence investor returns.

Understanding and addressing these risks are relevant considerations for international investments.

In India, global ETFs are treated similarly to debt mutual funds for taxation purposes. The applicable taxes depend on the holding period:

• Short-Term Capital Gains (STCG):
  If units are held for less than 3 years, the gains are added to the investor’s income and taxed according to the applicable income tax slab.
  

• Long-Term Capital Gains (LTCG):
  If units are held for 3 years or more, the gains are taxed at 20% with indexation benefits, which account for inflation when calculating the purchase price.
  

• Dividends:
  Any dividends received from global ETFs may be taxed in the country of origin. Investors may be eligible for Double Taxation Avoidance Agreement (DTAA) relief, depending on bilateral treaties between India and the foreign jurisdiction.

In summary, understanding the taxation of global ETFs in India helps investors make informed decisions, estimate post-tax returns, and plan their investments in compliance with domestic and international regulations.

Global ETFs can provide Indian investors with an approach to international diversification. An understanding of the available investment avenues, associated costs, risks, and regulatory frameworks can inform investment decisions.

International diversification through global ETFs may contribute to portfolio composition. Consideration of the characteristics of foreign investments is relevant.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.