Key Takeaways

Today, WisdomTree launched the WisdomTree India Hedged Equity Fund (INDH), combining our currency-hedging knowledge with the increased interest in hedging exposure in the Indian market. In this blog post, we will outline this new, exciting approach to Indian equities.

Foreign investor interest in India is perking up.

India-focused ETFs had inflows of $6.7 billion over the last 12 months. To put those flows into context, China-focused ETFs had net outflows of $2.6 billion over this same period.²

One of the many reasons for this divergence in flows has to do with India’s superior economic growth and stock market performance.

Bolstered by increased infrastructure spending by PM Modi’s government, India is transforming from the back office of the world to a leading manufacturer of cutting-edge technology. Economic growth in India has continued to impress, posting an 8.4% surge in the last quarter of 2022³. At this pace, India is set to surpass Japan and Germany to become the world’s third-largest economy by 2027.⁴

The MSCI India Index (MXIN), a market gauge of 130 stocks, outperformed the S&P 500, MSCI ACWI and MSCI Emerging Markets Indexes in the most recent one-year period,⁵ providing investors with an almost 37% return. Over the last decade, MSCI India has had a 9.7% annual return, outpacing the global market (as measured by the MSCI ACWI Index) by more than 1%.¹

Stock performance has been supported by a strong underlying economy, growth in services and manufacturing, a rise in the ease of doing business, better corporate governance standards, political stability and favorable global sentiment.

Why Hedge Your Currency Exposure for India?

Emerging market (EM) investors recognize that increased performance potential does not come without an increase in volatility, driven both by higher volatility in local stocks and added currency fluctuations. Over the last eight years, the average absolute difference between USD and local calendar year returns, which isolates currency volatility, was the following:

• Developed international (measured by MSCI EAFE): 5.15%

• Emerging markets (measured by MSCI EM): 2.60%

• India (measured by MSCI India): 4.74%

In the below chart, we can see the impact of hedging exposure to the Indian rupee (INR) for a U.S. dollar (USD) investor. On average, USD investors saw the volatility of their Indian exposure reduced by an average 3.5% annually when hedging out currency movements. This brought the volatility of their India exposure closer to—if not below—that of U.S. equity markets.

Rolling 36m Annual Volatility

For definitions of indexes in the graph above, please visit the glossary. 

One objection to hedging currency is that it can be expensive due to interest rate differentials—particularly for emerging market foreign exchange (FX). However, the cost of hedging INR exposure for a USD investor has come down significantly in the past few years as India’s monetary policy rates have converged and the U.S. has become more restrictive in its inflation fight. The most recent six-month average implied cost of carry, or interest rate differential, was -1.54%—there were many years in the last decade with the Fed anchored at a zero lower bound when the cost of hedging was well over 5%.

Interest Rate Differential

The WisdomTree India Hedged Equity Index

WisdomTree has been at the forefront of providing both exposure to the Indian market and currency hedging for a long time.

In 2008, WisdomTree launched its India Earnings Fund (EPI), which holds close to $3 billion in assets under management (AUM).

And in 2010, WisdomTree launched its currency-hedged franchise, which now includes nine funds and $9.5 billion in AUM as of April 2024.

Combining our currency-hedging knowledge with the increased interest in hedging exposure in the Indian market, WisdomTree launched its India Hedged Equity Index (WTIEQH) earlier this year.

The WTIEQH Index selects the 75 largest Indian securities and weights them by float-adjusted market capitalization. At rebalance, the single stock exposure is capped at 10%, and sector exposures are capped at 30%. The Index is rebalanced annually in September using data as of the end of August. The Index is designed to neutralize fluctuations in the INR using one-month forward rates.

WTIEQH is intended to be a market-type exposure providing added value through its currency hedge.

Index Top Holdings

Index Sector Weights

Like MSCI India, WTIEQH has significant exposure to the Financials, Information Technology and Energy sectors.

Sector Exposures

Introducing the WisdomTree India Hedged Equity Fund (INDH)

The WisdomTree India Hedged Equity Fund (INDH) seeks to track the price and yield performance, before fees and expenses, of the WisdomTree India Hedged Equity Index.

Why INDH? 

INDH offers a compelling investment opportunity for those looking to gain broad equity exposure to Indian companies while addressing the potential risks associated with currency fluctuations. By incorporating a currency hedge, INDH mitigates the impact of the Indian rupee’s volatility, ensuring that investors can maintain their exposure to Indian equities without the added uncertainty of currency movements relative to the U.S. dollar. This strategic approach allows investors to focus on the intrinsic value and growth potential of Indian companies rather than worrying about the adverse effects of exchange rate fluctuations on their investments.

¹ Source: Bloomberg. Data as of 3/28/24.

² Source: Babel, Ayush, “India for the Long Run”, WisdomTree, https://www.wisdomtree.com/investments/blog/2024/03/21/india-for-the-long-run

³ Forecasts are inherently limited and should not be relied upon when making investment decisions. There is no guarantee projected growth will occur.

⁴ Source: WisdomTree. Data from 3/31/23–3/29/24.

⁵ Source: WisdomTree. Data from 3/31/14–3/29/24. Past performance doesn’t guarantee future results. It is not possible to invest directly in an index.