As Indian equities represent just ~3% of the global market cap, there exists significant investment opportunity outside India. International investing in India has picked up substantially, with the AUM of international funds growing ~15x over the last three years. A large chunk of this has been directed towards the United States, driven by the exceptional performance of large and mega-cap Tech companies. However, the remaining global opportunity that includes Developed Markets ex-US, Emerging Markets, and other emerging themes remains largely unexplored.
The benefits of international investing
International equity offers great diversification opportunity as it usually tends to have a very low correlation with Indian equity. Since different markets rarely move in tandem over the medium to long-term, underperformance in one market may be offset by better performance in another. This can greatly help reduce volatility in the overall portfolio, smoothening your wealth creation journey. Historically, the INR has depreciated against developed market currencies (such as the USD) over time. Over the last 10 years, the Indian rupee has depreciated from the level of ~50 INR/USD to ~75 INR/USD today. This translates to ~4% per annum of additional returns for USD denominated assets. Indian investors may benefit if this continues in the future as well. Additionally, investing in international equity provides access to unique business models and brands that may not be available in India such as Microsoft, Apple, Google, Sony, and Louis Vuitton etc. Today investors have the option to invest in some of the world’s most popular investing themes, which were not available even a few years ago.
Popular investment themes around the world
With the United States representing about ~59% of the global market-cap, it is no surprise that the top 5 largest Equity ETFs (with a combined AUM of ~USD 1.5 trillion) invest in US stocks. Therefore, funds tracking a US broad market index like the S&P 500 can be a great starting point. Investors looking to take a more concentrated exposure to global Technology brands like Microsoft, Apple, Google, etc. may find funds tracking the tech-heavy Nasdaq-100 index more appealing.
Exhibit – The world’s largest Equity ETFs by assets
| Rank | Name | Market / Theme | AUM (in USD Billion) |
| 1 | SPDR S&P 500 ETF Trust | US – Broad Market | 422.3 |
| 2 | iShares Core S&P 500 ETF | US – Broad Market | 319.6 |
| 3 | Vanguard Total Stock Market ETF | US – Broad Market | 289.9 |
| 4 | Vanguard S&P 500 ETF | US – Broad Market | 275.3 |
| 5 | Invesco QQQ Trust | US – Technology | 210.1 |
| 6 | Vanguard FTSE Developed Markets ETF | Developed Markets ex-US | 104.5 |
| 7 | iShares Core MSCI EAFE ETF | Developed Markets ex-US | 100.9 |
| 8 | Vanguard Growth ETF | US – Style | 90.1 |
| 9 | Vanguard Value ETF | US – Style | 89.0 |
| 10 | Vanguard FTSE Emerging Markets ETF | Emerging Markets | 78.5 |
| 11 | iShares Core MSCI Emerging Markets ETF | Emerging Markets | 76.8 |
Source: etfdb.com. Data as on 02-Dec-2021. The above table is used to explain the concept and is for illustration purpose only and should not be used for development or implementation of an investment strategy.
Investors who already have some allocation to US equities can look at adding other themes like Developed Markets ex-US and Emerging Markets to their portfolio. Taking a holistic approach to asset allocation by spreading your investments across different geographies can greatly help reduce overall portfolio volatility. It can also help reduce country-specific risks in your portfolio which can become apparent in times of geopolitical turmoil.
Over the past few years, there has been a surge in demand by investors around the world for new investing themes such as ESG, Clean Energy, Disruptive Technology, and Innovative Healthcare. These themes focus on companies that are likely to benefit from the rise of new economies – high-growth industries that leverage data and technology to drive innovation.
Key takeaways
Though international investing has seen strong traction in India over the last few years, it remains largely overlooked as an asset class. International equity offers a great diversification opportunity that can help in reducing overall portfolio volatility, without necessarily compromising on returns. The US remains one of the most popular investment destinations for investors around the world. Over the last few years, investors have started looking at new and emerging investment themes such as Disruptive Technology and Innovative Healthcare. According to internal research, investors may benefit from allocating 20-40% of their overall portfolio to international equity, depending on their financial goals and risk appetite. However, investors should consult their investment advisor before investing.
This article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The indices mentioned herein is for explaining the concept and shall not be construed as an investment advice to any party. The information / data herein alone is not sufficient and should not be used for the development or implementation of any investment strategy. It should not be construed as an investment advice to any party. All opinions, figures, estimates and data included in this article are as on date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
