Vanguard shift will result in more FII inflows into India

With expected additional inflow of $1.5 bn, India to be third-highest beneficiary of the move experts say others may follow Vanguard move

Indian stock markets are set to record additional inflows of up to $1.5 billion from global exchange-traded funds (ETFs), owing to the decision of Vanguard Group, America’s largest fund company, to change its benchmark from MSCI to FTSE for six of its international index funds from 2013.

Currently, about 70 per cent of the flows from foreign institutional investors into India are from ETFs, said stock market analysts. ETFs are listed on stock exchanges and entail the same stocks and the same proportion as the underlying index. So far this year, the Indian stock market has received net inflows of Rs 83,780 crore ($16.33 billion).

India would be a beneficiary of the movement from MSCI to FTSE, as it is considered an emerging market by Vanguard. Vinod Sharma, head of business (private broking and wealth management), HDFC Securities, said, “This will mean higher weight for India, as South Korea is considered a developed market by FTSE, and will not find a place in the allocations.”

A number of other emerging markets would also benefit from this exercise. India would be the third-highest beneficiary, after Brazil and South Africa, which would gain $2 billion and $1.55 billion, respectively, according to a report by JP Morgan. South Korea and China stand to lose the most — $9 billion and $370 million, respectively.

While Vanguard’s decision was aimed at reducing investment costs by bringing down the key expense of investing-—the fee paid to firms that license benchmarks like MSCI and FTSE. This would help Vanguard investors save about $500 billion.

In a press release issued yesterday, Vanguard Chief Investment Officer Gus Sauter stated, “With our clients’ best interests in mind, we negotiated licensing agreements for these benchmarks that we expect would enable us to deliver significant value to our index fund and ETF shareholders, as well as lower expense ratios over time.”

U R Bhat, managing director, Dalton Capital, said, “This is an important move, which could trigger others’ decision as well.” A senior investment banker said, “Given the fact that ETFs work on very low expenses, Vanguard’s move may encourage others like Barclays Global Investors to shift to cheaper benchmarks, and this would benefit India.”

The JP Morgan report stated stocks expected to benefit the most from this move included ITC ($344 million), Infosys ($146 million), ONGC ($122 million), RIL ($100 million) and Bharti ($86 million).

“In an environment in which index licensing fees, in general, have represented a growing portion of the expenses investors pay to own index funds and ETFs, the long-term agreements with FTSE and CRSP will provide cost certainty with these two index providers,” Sauter said. Vanguard has shifted another 16 US stock and balanced index funds to new benchmarks developed by the University of Chicago’s Center for Research in Security Prices.