Rush begins for investment tools, India-linked ETFs now in high demand

If there is one phenomenon that India’s inclusion in a JP Morgan bond index has sparked, it is the global rush to find ways to access local debt. India-linked international exchange traded funds (ETF) are increasingly catering to that need, with assets of such funds now nearing a billion dollars.

Since September 2023, when JP Morgan announced India’s inclusion effective from June of this year, new global bond ETFs focusing on Indian debt have been set up, while some that were established earlier have seen their assets increasing.

“One route in which we have seen a lot of a pickup is this – certain funds have launched ETFs linked to Indian government bonds and for some of the smaller players, maybe it’s easier for them to go and buy those ETF units to access India instead of coming and getting registered directly,” said Aditya Bagree, head, markets, Citi – India & Indian Subcontinent.

At present, there are five global ETFs which offer exposure to Indian government bonds – Legal and General Investment Management’s L&G India INR Government Bond UCITs ETF, UTI’s India Sovereign Bond UCITs ETF, Xtracker’s India Govt Bond UCITs ETF, Tabula’s FTSE Indian Government Bond Short Duration UCITs ETF and BlackRock’s India Govt bond UCITs ETF.

According to factsheets published by these ETFs, the total assets managed by these five currently stands at $835 million. Prior to September 2023, the total assets were less than $600 million, foreign bankers said.The ETFs, which buy Indian government bonds as registered FPIs, aim to provide easy access to local debt for some unregistered foreign players. Direct access to government bonds through FPI licences would require overseas players to go through multiple operational layers.UCITs refers to Undertakings for the Collective Investment in Transferable Securities and falls under the purview of European Union regulations for mutual funds.While several large foreign funds have obtained FPI licences to trade directly in Indian government bonds, there are smaller players who have opted for other ways to take exposure to local debt pending registrations. Apart from buying India-focused ETF units, the alternate routes to take exposure to local debt are Total Return Swaps and rupee-denominated supranational bonds.

At present, the largest of the five ETFs is the L&G India INR Government Bond UCITS ETF, which has a fund size of $698.9 million according to a factsheet for investors and investment professionals dated May 31, 2024. As on June 30, 2024, assets of Tabula’s India government bond ETF were at $0.6 million.