First rupee-denominated ETF listed on LSE

A year after the International Finance Corp (IFC) issued its first rupee-denominated “masala bonds” in London, an exchange-traded fund (ETF) that clubs highly rated domestic state-owned corporate bonds was listed on the London Stock Exchange on Friday.

The fund constitutes one bond each from AAA-rated firms such as Indian Railways and Rural Electrification Corp, said Sun Global Investments and Zyfin Funds — the issuers of the exchange-traded fund , in a statement.

The ETF “offers British and international investors exposure to a basket of Indian public sector corporate bonds. The fixed income ETF will be Europe’s first physically replicating Indian ETF backed by real underlying securities as opposed to notional securities or derivatives,” the issuers said in the statement.

The constituent bonds in the domestic market have AAA-ratings and a residual maturity between four to 20 years with current average maturity of 8.97 years. The average yield of the bonds is about 8.23 per cent.

The yields are one of the highest in the world, coming from a major developing economy. However, investors will have to take the exchange risk if they are not hedging their exposure.

After hedging only for the currency risk (and not interest rate), the bonds will still offer returns of about two per cent for the investors, which is considered respectable in the international market.