UTI International has launched a fixed income ETF in Europe providing dedicated exposure to local currency bonds issued by the government of India.
India’s bond market is estimated to be worth more than $2 trillion.
The UTI India Sovereign Bond UCITS ETF (UIGB NA) has been listed on Euronext Amsterdam in US dollars.
The fund has an expense ratio of 0.75%.
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 at 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.
Methodology
The ETF is linked to the Nifty India Select 7 Government Bond Index which comprises the seven most liquid, 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 at least two years at initial inclusion.
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.