Understanding Global ETFs- Access Methods for Indian Investors

Global Exchange-Traded Funds (ETFs) provide exposure to international markets, helping investors diversify beyond domestic assets. With growing interest among Indian investors, this article explores how to access global ETFs, key considerations, risks, and taxation—offering a clear understanding of their role in investment portfolios.

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.

Many ETFs provide international exposure and are available either through direct purchase on foreign exchanges or via Indian markets:

This table provides examples of ETFs that offer international exposure to Indian investors.

Global ETFs may introduce several characteristics to a portfolio, such as:

• Geographic Diversification: The distribution of investments across multiple countries may influence the impact of country-specific risks.

• Access to Growth Markets: Global ETFs may provide exposure to developed and emerging markets; however, individual performance can differ.

• Currency Diversification: Exposure to various currencies may influence domestic currency risk; however, it does not ensure complete insulation.

• Cost Efficiency: ETFs may feature expense ratios that differ from those of mutual funds, which can influence investment costs.

• Liquidity: ETFs are traded similar to stocks, commonly exhibiting intraday liquidity and price transparency. However, liquidity can differ based on the specific ETF.

These characteristics position global ETFs as an investment vehicle considered by investors. Individual investment outcomes can differ.

Global ETFs are ideal for investors looking to diversify their portfolios beyond domestic markets and gain exposure to international economies, sectors, or themes. They suit long-term investors seeking growth opportunities across geographies, as well as those aiming to reduce country-specific risk. Beginners and experienced investors alike can consider global ETFs for cost-effective, diversified, and convenient global exposure.

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.

Investments in global ETFs are treated as debt mutual funds for tax purposes in India.

• Short-Term Capital Gains (STCG): If held for less than 3 years, gains are added to your income and taxed as per your income tax slab.
  

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

Additionally, dividends (if any) from global ETFs may be taxed in the country of origin and can be subject to Double Taxation Avoidance Agreement (DTAA) benefits.

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.

• Securities and Exchange Board of India (SEBI): https://www.sebi.gov.in/
  

• National Stock Exchange of India (NSE): https://www.nseindia.com/
  

• Bombay Stock Exchange (BSE): https://www.bseindia.com/
  

• Reserve Bank of India (RBI) – Liberalised Remittance Scheme: https://www.rbi.org.in/
  

• Investopedia – Global ETFs: https://www.investopedia.com/terms/g/global-etf.asp
  

• Morningstar – Global ETF Guide: https://www.morningstar.com/articles/971182/global-etfs