Sydney-based ETF provider BetaShares has unveiled a new fund on Australian Securities Exchange which provides exposure to a high-quality portfolio of Indian equities.
India is expected to grow its GDP by around 7.5% per annum over the next five years, according to IMF estimates.
The BetaShares India Quality ETF (IIND AU) offers Australian investors a new means to diversify their portfolios as historically Indian equities have shown relatively low correlation with both Australian and global equities.
The fund also provides a vehicle to tap into the Indian growth story with the IMF predicting the country’s GDP to expand by around 7.5% per annum over the next five years.
India’s less developed equity market can, however, lead to inefficiencies for conventional market-capitalization-weighted strategies. To counter this, BetaShares has teamed up with index providers Solactive to deploy a smart beta methodology that endeavours to provide a more desirable exposure.
Methodology
The fund is linked to the Solactive India Quality Select Index, an index which includes the top 30 of India’s domestic companies based on a weighted ranking of key factors scores.
The index selects its constituents from a universe consisting of the 75 largest stocks by free-float market capitalization listed in India (although an existing constituent can remain in the selection pool so long as it hasn’t fallen outside of the top 100 by market cap).
To select the final 30, the universe of stocks is split into two groups. The first group consists of the largest stocks whereby the sum of their market caps approaches 50% of the universe’s total market cap, up to a maximum of 13 securities. The remaining stocks constitute the second group.
Each stock is ranked within their group based on a quality factor score derived from four metrics: return on equity, earnings per share growth, debt-to-equity ratio, and earnings stability. All the securities in the first group are selected for inclusion. In the second group, the securities with the highest quality scores are chosen such that 30 stocks are included in the final index.
The first group receives a total weight that equals the sum of their market cap weights relative to the total selection universe, approximately 50%. The second group receives the remaining weight. Within each group, the security with the highest quality score will receive twice the weight of the security with the lowest quality score, while all stocks in-between are allocated weights based on a linear function between the two points.
The index is reconstituted and rebalanced annually in June.
The fund comes with an expense ratio of 0.80% and distributes income to investors on a semi-annual basis.
At 80 bps, the fund is five basis points cheaper than the ETFS Reliance India Nifty 50 ETF (NDIA AU) – the only other pure-play India ETF in Australia – which debuted in June 2019. The ETFS fund tracks the Nifty 50 Index, the National Stock Exchange of India’s benchmark for the performance of the Indian equity market.
Compared to the market-cap-weighted Nifty 50, the Solactive India Quality Select Index offers increased sector diversification, in particular by reducing exposure to the financials sector which accounts for a 40.3% weight in the Nifty 50 Index.
The largest sectors in the Solactive index are consumer staples (27.4%), information technology (21.1%), financials (18.4%), energy (10.6%), and consumer discretionary (9.6%). The largest individual constituents are Tata Consultancy (8.6%), Infosys (7.9%), Hindustan Unilever (7.7%), ITC (6.5%), and Maruti Suzuki (4.9%).
According to BetaShares, “India is a country with tremendous economic growth and investment potential. At the same time, due to its quite different economic structure, it also offers a useful source of added portfolio diversification for Australian investors. In order to tap into the potential of this dynamic market, the BetaShares India Quality ETF explicitly screens for companies that score highly on ‘quality’ characteristics, such as good profitability and moderate debt levels.”
Timo Pfeiffer, Head of Research at Solactive, commented, “The Indian economy has further room to expand at higher-than-average growth rates. Although some points on the reform agenda will be painful…Modi and his government seem to take necessary and promising steps. One example is the facilitation of FDIs that could boost investments in the country. Working with BetaShares to facilitate Australian investors’ exposure to the Indian equity market was an exciting project for everybody involved.”