MCB, ZyFin launch Indian sovereign bond ETF aimed at international investors

May 6th, 2016 | By | Category: Fixed Income

MCB Capital Markets and ZyFin have together launched an exchange-traded fund giving international investors access to the Indian sovereign bond market for the first time. The MCB India Sovereign Bond ETF is domiciled in Mauritius and will be listed on the Stock Exchange of Mauritius in June.

MCB Capital Markets launch world’s first Indian Sovereign Bond ETF

The MCB India ETF tracks the performance of the most liquid, fixed rate, Indian Rupee denominated bond issued by the Government of India, with a typical maturity between 8 and 13 years.

The ETF will replicate the ZyFin India Sovereign Bond Liquid Index, which tracks the performance of the most liquid, fixed rate, Indian Rupee-denominated bond issued by the Government of India, with a typical maturity between 8 and 13 years.

Indian government bonds have traditionally been difficult for foreign investors to access because of minimum investment thresholds, ceilings on foreign holdings and other regulatory processes.

India’s sovereign bond market is one of the world’s largest and most attractive with outstanding issuances in excess of US$650bn. The country has investment grade status (S&P BBB-) and has not suffered a downgrade for over a decade, despite several domestic and global crises.

India, Asia’s third largest economy based on real GDP, and the world’s third largest economy based on purchasing power parity, is expected to grow at an average of 7.6% per annum over the 2016-2021 period, according to IMF estimates. These estimates support the argument that India is currently the fastest growing large economy globally. While investors in this ETF will be exposed to currency risk, the exchange rate volatility between the Indian rupee and the US dollar has been among most the stable compared to other emerging market peer currencies.

Favourable demographics compared to other emerging market countries may also help India to maintain its current strong growth over the long term. India’s dependency ratio (number of population over 65 years as a percentage of the total population) is relatively low, the middle-income class is growing, and access to education has been consistently improving.

MCB highlights that there is no issuer risk diversification to be achieved by holding more than one bond given that the sole issuer within the index is the government of India. Furthermore, given the current yield curve of the Indian sovereign bond market, the risk-return trade-off from holding a selection of bonds across the maturity curve is not optimal. The premium obtained from holding longer-dated bonds is less than 50bp while duration risk increases significantly. Moreover, that the 8-13 years maturity range enjoys higher trading volumes than all other ranges combined; therefore, the potential yield advantage of longer-dated bonds is cancelled out by increased trading and liquidity costs.

Distributions from the ETF will be made to shareholders on a semi-annual basis. The fund may appeal to investors seeking regular income through higher yielding securities while still maintaining reasonable credit risk through the investment grade status of the underlying investment. MCB suggests the fund be bought by investors with a minimum 5 years investment horizon

The ETF may also provide favourable tax treatment as it is domiciled in Mauritius and authorized as a Global Fund. As such, it benefits from taxation treaties between India and Mauritius whereby all capital gains are currently exempt and income is taxed at 5%.

Gilbert Gnany, Chairman of the MCB India Sovereign Bond ETF, commented in a statement: “We are pleased to partner with ZyFin on launching the MCB India Sovereign Bond ETF, the first ETF created, domiciled and listed in Mauritius. Close to 50% of investments in India go through Mauritius and we plan to capitalise, through this ETF, on the special relationship between our two countries whilst providing easy access to the Indian sovereign debt market, one of the largest and most attractive bond markets in the world.”

Sanjay Sachdev, Executive Chairman of ZyFin, added: “Backed by our expertise in asset management and structuring innovative ETFs, we are excited to work with MCB Capital Markets and offer this attractive investment solution to access the Indian sovereign bond market. ZyFin is committed to offering exposure to difficult to reach but growing emerging markets. With the MCB India Sovereign Bond ETF and our successful listed LAM Sun Global ZyFin Sovereign Enterprise Bond ETF, we are delivering on that promise. This partnership also helps us further our goal of providing investment opportunities to global investors in an easy, cost-effective and transparent manner.”

The fund will commence trading on the Stock Exchange of Mauritius on 6 June 2016.

It has a total expense ratio of 0.99%.

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