Legal & General Investment Management (LGIM) has launched Europe’s first ETF offering dedicated exposure to rupee-denominated Indian sovereign bonds.

James Crossley, Head of UK Retail Sales at LGIM.

The L&G India INR Government Bond UCITS ETF has been listed on London Stock Exchange in US dollars (Ticker: TIGR LN) and pound sterling (TIGG LN), and on Deutsche Börse Xetra (TIGR GY) and Borsa Italiana (TIGR IM) in euros.

It comes with an expense ratio of 0.39%.

Investment case

India is the world’s sixth-largest economy and second-biggest emerging market – and its bond market is massive, estimated in 2021 at over $2 trillion.

Yet India’s sovereign bond market has suffered historically from restrictions to foreign investors as the Reserve Bank of India has sought to maintain influence over yields through open market operations.

This is changing, in part due to the introduction of the so-called Fully Accessible Route last year, a new channel for non-residents of India to gain unlimited access to certain government securities.

The development has led JP Morgan to state that Indian government bonds are on track to be placed on its watch list for inclusion in the headline JP Morgan EM Global Government Bond Index, a move that could prompt $25 billion of inflows, according to the investment bank’s analysts.

India’s sovereign bonds are currently rated at the lower end of the investment-grade scale – S&P recently affirmed the country’s BBB- rating with a stable outlook. The 10-year government bond yield is trading around 6.35% at the end of October.

With yields of comparably rated bonds in developed markets still low by historical standards, the fund is likely to appeal to income-seeking investors who are willing to flex their risk tolerance whilst nonetheless remaining within an investment-grade mandate. It is also likely to appeal from a portfolio diversification perspective as local-currency Indian bonds have typically exhibited a low correlation with developed market debt and that of other emerging markets.

Commenting on the launch, Lee Collins, Head of Index Fixed Income at LGIM, said: “We are delighted to launch the L&G India INR Government Bond UCITS ETF, offering investors exposure to one of the world’s largest government bond markets. Clear progress has been made by the Indian authorities to allow easier access for foreign investors and the country has been on a path to be included across major fixed income indices. We think it is now an appropriate time to offer this product to investors.”

James Crossley, Head of UK Retail Sales at LGIM, added: “By introducing Europe’s first local currency Indian bond ETF, LGIM continues to bring innovative and meaningful solutions to customers, which have been at the heart of the firm’s strong growth in the ETF space over the last three years. This product complements our successful fixed income ETF range, providing investors with the opportunity to enter a growing market early and offering an exciting option in their search for strong yields.”

Index methodology

The fund is linked to the JP Morgan India Government Fully Accessible Route Bonds Index which provides exposure to rupee-denominated Indian government bonds that have been made eligible for investment to non-residents under the Fully Accessible Route.

Eligible issues must be fixed-rate or zero-coupon and have a minimum size of $1 billion equivalent and a remaining time to maturity of two and a half years at initial inclusion. Existing bonds are removed from the index when their remaining maturity falls below six months.

Bonds are also screened for sufficient liquidity according to trading frequency, availability, and transaction costs in order to ensure the index remains reflective of current prices and can be cheaply replicated.

Constituents are weighted by market value, and the index is rebalanced on a monthly basis.

As of 28 October, the index was yielding 6.2% with an effective duration of 6.5 years.