Global Vs Local – NASDAQ ETF

By: Sanjay Dongre, Tavaga Research

As it turns out, investors worldwide have taken a fancy to the Technology Index, and everyone seems to be wanting exposure to the NASDAQ 100.

Motilal Oswal AMC that manages the mutual fund products of Motilal Oswal mutual fund launched the N100 ETF way back in Mar’2011 to meet this market need. It is listed on the NSE and is a pretty liquid counter with an average daily volume of one lac shares (the price tick is in the Rs 850 range) and an Impact cost of 0.10.

It was a good option to take exposure on the most lucrative Index in the world. That’s what our intent was when we launched the ETF in 2011. Today it is undoubtedly the most popular investment product among savvy investors, who believe in global diversification.

However, in 2021 contrary to popular belief the N100 ETF is not the only option for Indians to take exposure on the fabled American technology index. There are many more windows; facilitated by the Reserve Bank of India, long back, even before the N100 ETF was launched in India.

Way back in 2004, the central bank had introduced the Liberalised Remittance Scheme (LRS).

“as a liberalization measure to facilitate resident individuals to remit funds abroad for permitted current or capital account transactions or combination of both.”

Resident Indians were allowed to freely remit up to USD 25,000 per financial year for any permitted current or capital account transaction or a combination of both.

With seven amendments since then, by May 2015, this limit had been expanded to USD 250,000 per financial year.

Clause 6, (of the RBI/FED/2017-18/3 FED Master Direction No. 7/2015-16) outlines the permissible capital account transactions by an individual under LRS, and subclause (iii) spells it out,

“making investments abroad- acquisition and holding shares of both listed and the unlisted overseas company or debt instruments; acquisition of qualification shares of an overseas company for holding the post of Director; acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes;”

Given this progressive liberalization, investors can invest in ETFs offered by the global players to take exposure in the various globally traded ETFs, including ETFs on NASDAQ 100, instead of being limited to the ones offered by the local players.

And yes, unlike the world of physical goods where tariff or non-tariff barriers can be put up, there is no such possibility in our search for the best investment products.

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Out here we compare one such Global ETF against the Local ETF offered on the NASDAQ 100 Index, in a bid to understand how much our local ETF offerings have evolved over a period of time, and how it fares against the global peers in 2020.

Competition in the post-Covid world comes from anywhere. Right now, Right here we are looking at Invesco Versus Motilal Oswal AMC, two large players on their respective home turf. Just that the lines defining home turf got blurred.

The local ETF offering MO N100 was launched in 2011, which is about a decade after Invesco had launched the Cubes in 1999. In hindsight, it was quite a terrible time to launch a NASDAQ ETF as soon enough it faced Y2K.

In the decade of its existence, MO N100 has accumulated assets worth 1,714 cr (as on Sep 30 2020) while CUBES has reached 134 USD Billion.

Before we read the following table, it has to be noted that N100 is a Rupee-denominated offering, that is distributed in India but invested in the US of A. It has currency translation implications, as the NAV is first computed in USD terms and then translated in INR terms, thereby involving currency movement, which generally benefits investors from India.

The difference in returns of the NASDAQ 100 and N100 – Index (INR), that is 60.66% against 60.96% on the one-year horizon is essentially the INR depreciation.

It also means that to compare performance, including tracking errors, the MO N100 ETF would be compared not with the underlying index, but with the NASDAQ 100 (INR), whereas Cubes would get benchmarked against the NASDAQ 100 Index.

There are two key parameters to consider.

We will leave out the complicated Tracking Error computation, but use the simplistic Return Difference metrics to see how closely the index returns are being mirrored.

On both the investment horizons, that is three years and five years, the Local offering has a deviation of over 100 basis points, and as such has a long way to go to match up to its global peer. (the figures are as of Sep 30th, 2020)

One of the reasons for the large gap in mirroring returns is the expense ratio that seems to be on a higher side in the local offering, at 0.54 % compared to the lean 0.20 % of the Cubes. Incidentally, the Expense Ratio of Cubes is not amongst the least, Vanguard has many products running at single-digit TERs. So we can expect Cubes to cut down its cost sooner than later.

Now that investors are enabled by the RBI to remit funds abroad, and there may be investment products available in the Exchanges abroad to invest, the third piece is the “how to do it” part. Most of the brokerage firms in India have now enabled this feature on the digital platforms and it is a swift seamless process. If someone makes a decision over breakfast to buy Cubes by sunset, that is when the NASDAQ opens up, the broking account can be set up.

Investing in global ETFs offer the underlying advantage of the exposure to the Index and also the currency exposure as whenever, the investment is sold off and proceeds are brought back to India, it will be converted back in INR at the then prevailing exchange rates.

To conclude, globalization is truly here. Resident Indians can now look beyond the investment products offered by local manufacturers and go for the best in class products. Not just efficient, but the best in class investment products, with global diversification.

The competition that it brings to our doors will only help our local products to get better and better. In this technology-driven world, where India has a core competitive advantage, maybe we might as well do it better than the global peers.