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Access Indian equities Why ETFs may be the best route to India This document is for the exclusive use of investors acting on their own account and categorised either as “eligible counterparties” or “professional clients” within the meaning of markets in financial instruments directive 2004/39/ce. THIS IS NOT TAX ADVICE. IF YOU NEED SUCH ADVICE, WE RECOMMEND SPEAKING TO YOUR TAX ADVISOR. Access Markets July 2018
Access Indian Equities | Lyxor MSCI India UCITS ETF
The latest on
Indian futures
In February 2018, Indian exchange providers announced they
would stop licensing Indian indices to foreign entities in an
attempt to bring liquidity back to onshore Indian markets.
Background Consequences
►► Indian derivatives such as futures are tradable on ►► You may not be able to trade MSCI Indian futures after
foreign jurisdictions and different exchanges (ICE, the summer
Eurex, SGX) ►► MSCI India index futures traded on ICE, Eurex and
►► Indian exchanges believe the proliferation of Indian SGX exchanges are at termination risk from August
derivatives trading on foreign exchanges has driven onwards, pending announcement from MSCI and the
liquidity away from local markets. As such, they are stock exchanges.
keen to bring the liquidity back to local markets. ►► There are exceptions on the potential licensing halt. For
►► In February 2018, Indian exchanges unexpectedly example, it is not applicable to the issuance of ETFs,
announced they would stop providing equity market subject to prior permission of the licensor.
data to overseas entities. While the final implementation ►► INX is in discussions with index providers, e.g. SGX,
of the regulation remains unconfirmed, investors should to bring offshore traded Nifty 50 futures to its trading
not ignore the potential impact on the trading of foreign venue in GIFT City. However, nothing has been
derivatives (e.g. Indian futures on SGX). finalized.
►► On the other hand, Indian exchanges have partnered ►► The matter is complicated further by the National Stock
with India International Exchange (“INX“) where dollar Exchange of India (NSE) taking legal action against SGX
denominated derivatives could be traded. INX is multi for trying to launch an alternative derivative contract,
exchange platform based in Gujarat International making the deal to bring offshore futures to GIFT less
Finance Tech (GIFT) City to allow trading of derivatives likely. The arbitration proceedings are continuing and the
by all foreign investors (including FPIs or non FPIs). hearing is to commence in early 2019.
►► However, so far, trading on INX has not picked up due ►► Nifty 50 Futures will continue to trade until the dispute
to multiple operational setup and trust issues. is resolved.
The largest and most liquid India ETF*
Accomplished Liquid Dependable Efficient Broad
The largest on The most traded on The oldest on the The most efficient Capture approximately
the market, with $1.4bn exchange, with the market, with over on the market** 85% of the Indian
in assets* tightest spreads** 11 years of track record* equity universe*
ETF name Bloomberg Tickers Listing currencies Fund domicile AuM* TER*
Lyxor MSCI India UCITS ETF INR FP, INRU LN, INRL LN EUR, USD, GBP France $1.4bn 0.85%
*Source: Lyxor International Asset Management. Data as at 30/05/2018. Statements refer to European ETF market.
**Source: Lyxor International Asset Management, Bloomberg. Data over one year as at 31/05/2018. Efficiency data is based on the efficiency indicator created by Lyxor ‘s research department in
2013. It examines 3 components of performance: tracking error, liquidity and spread purchase/sale. Each peer group includes the relevant Lyxor ETF share-class and the 4 largest ETF share-
classes issued by other providers, representing market-share of at least 5% on the relative index. ETF sizes are considered as an average of AUM levels observed over the relevant time period.
Detailed methodology may be found in the paper ‘Measuring Performance of Exchange Traded Funds’ by Marlène Hassine and Thierry Roncalli. Statements refer to European ETF market. Past
performance is no guide to future returns.3
The story behind
the headlines
June 2016
SEBI enforce stricter KYC rules for ODI
trading. Pushing ODI clients towards
taking FPI license
January 2017
Indian Government under Prime
Minister Modi – launch trading at GIFT
City. A free trade zone for accessing
Indian Markets for foreign investors.
July 2017 Based in Modi’s home town
SEBI – amend rules for LD ODI trading.
ODI traders need to have one for one
hedge with cash equity positions
February 2018
SGX launch cash settled SSF on Indian
underlyings February 2018
Indian Exchanges cancel licensing
February 2018 arrangements for global exchanges on
SEBI amends rules to enable clients to Index contracts, SGX Nifty 50 as well
register as Foreign Portfolio Investors as others impacted
(FPIs) in India more easily
March 2018
SEBI announce SSF contracts to move
to physical settlement
April 2018
SGX announce launch of Indian Index
Futures contracts. Existing positions
will roll into these contracts
June 2018
NSE takes SGX to court and gets a stay
order on SGX India futures
2018 – 2019
Nifty 50 contracts will continue trading
April 2019
on SGX 2 months post the arbitration
Indian Elections.
completion date
Impact on GIFT City if Modi is not
re-elected?
KYC: Know your Customer. FPI: Foreign Portfolio Investment.
SEBI: Securities and Exchange Board of India. SGX: Singapore Exchange Limited.
ODI: Offshore Derivatives Investment. SSF: Single Stock Future.
LD: Listed Derivatives. GIFT: Gujarat International Finance Tec-City
Source: Societe Generale Trading, SGX, NSE, SEBI, as at July 2018.Access Indian Equities | Lyxor MSCI India UCITS ETF
Pros and cons of
ETFs and futures
If you can’t trade futures, it could be worth considering
ETFs as an alternative investment vehicle. ETFs and
futures have their own sets of benefits and drawbacks.
The table below highlights some of the main ones.
Benefits Drawbacks
ETFs ►► Dependable ►► Funding
ÎÎ predictable cost structure and tracking ÎÎ requires fully funded investment (no
trading on margin)
►► Accessible
ÎÎ operationally easy to implement / ►► Primary trading cost
accessible to more investor types ÎÎ trading on primary market can be costly
►► Simple FX management
ÎÎ listed on multiple venues in multiple
currencies – no need to manage currency
separately
►► Precision
ÎÎ smaller lot size – more precise
implementation
►► Secondary trading cost
ÎÎ liquid secondary market trading can
reduce cost
Futures ►► Liquid ►► Operational burden
ÎÎ generally good amount of liquidity ÎÎ posting of initial/variation margin, contract
rolls, FX management
►► Flexible
ÎÎ ability to short and trade on margin ►► Operational risk
ÎÎ execution uncertainty on entry/exit point
(no guaranteed closing price for futures)
►► “Hidden” costs
ÎÎ futures rollover cost monthly brokerage
and clearing fees
Source: Lyxor International Asset Management. For illustrative purposes only.5
Comparing
performance
So, for investors looking for exposure to Indian equities, ETFs may be
a good alternative given the potential regulatory and licensing risks
in the futures market. But how does their performance compare?
Cost analysis of the Lyxor MSCI India ETF vs. associated futures
Lyxor MSCI India
SGX Nifty 50 Futures
UCITS ETF (INR FP)
Replication Costs -0.78% Cash drag1 -0.85%
Management Fees -0.85% CoF5 -0.40%
Roll cost2 -0.37%
Execution cost (in) -0.30% Execution cost (in)3 -0.12%
Execution cost (out) -0.30% Execution cost (out)3 -0.12%
Tracking error 0.00% Trading error4 -0.88%
Total Performance -2.23% Total Performance -2.74%
Calculation based on a one year holding position built as of July 3, 2018.
Cash drag equals to 5% 1Y USD rate (14 bps), plus quanto cost (5 bps per month) and cost to hedge NDF at 1.0 bps 12 (12 bps).
1
Roll cost equals to USD 3 per leg plus USD 0.25 bid ask spread cost (annualised).
2
3
For a like-to-like comparison on execution costs in Nifty 50 Futures, we assume a guaranteed close plus fair value of basis and brokerage costs.
Tracking error equals to 0.88% annualised over 1 year rolling period between MSCI India and NIFTY.
4
5
CoF – implied Cost of Funding – dividend adjusted over 1Y period.
For illustrative purposes only. This is not a recommendation. Source:: Societe Generale Trading, Lyxor International Asset Management, as at 3rd July 2018.Access Indian Equities | Lyxor MSCI India UCITS ETF
The latest
on taxation
The Finance Minister confirmed in his budget speech
in February 2018 the return of a 10% tax on long-term
capital gains arising from listed equity shares.
What’s happened?
►► A long term capital gains tax of 10% is now applicable
to gains made over holding periods of more than 1
year, and exceeding Rs 1 lakh (approx. $1,500).
►► Gains up to Jan 31st 2018 will be grandfathered from
taxation.
►► Both domestic and foreign investors are impacted.
►► Short-term capital gains tax will remain at 15%.
Potential impact on foreign portfolio investors
►► Favoured routes to Indian equities such as Mauritius or
Singapore will lose their historical appeal after 2019.
►► The Netherlands and France look attractive considering
their tax treaties with India (+ stable political and
attractive tax regimes).
►► While CGT is payable on many offshore ETFs, French-
domiciled ETFs should be exempt from CGT, subject to
provisions of the General anti-avoidance rule (GAAR)
and the Multilateral Instrument (MLI).
The obtaining of the tax advantages or treatments defined in this document (as
the case may be) depends on each investor’s particular tax status, the jurisdiction
from which it invests as well as applicable laws. This tax treatment can be
modified at any time. We recommend to investors who wish to obtain further
information on their tax status that they seek assistance from their tax advisor.7
The Lyxor ETF
advantage
Scenario 1: simplified example assuming 10% annual return on MSCI India index1
Est. Expected performance
replication vs. index
ETF Domicile TER cost CGT Div. WHT 1Y 3Y 5Y
Lyxor MSCI India ETF France 0.85% 0.80% 0% 0% -1.65% -4.95% -8.25%
Synthetic UCITS Luxembourg 0.80% 0.80% 1%* 0% -2.60% -7.80% -13.00%
competitor*
Physical UCITS Ireland 0.65% 0.20% 1% 0% -1.85% -5.55% -9.25%
competitor
Physical US domiciled US 0.68% 0.20% 1% 0.30% -2.18% -6.54% -10.90%
competitor
Scenario 2: simplified example assuming 20% annual return on MSCI India index1
Est. Expected performance
replication vs. index
ETF Domicile TER cost CGT Div. WHT 1Y 3Y 5Y
Lyxor MSCI India ETF France 0.85% 0.80% 0% 0% -1.65% -4.95% -8.25%
Synthetic UCITS Luxembourg 0.80% 0.80% 2%* 0% -3.60% -10.80% -18.00%
competitor*
Physical UCITS Ireland 0.65% 0.20% 2% 0% -2.85% -8.55% -14.25%
competitor
Physical US domiciled US 0.68% 0.20% 2% 0.30% -3.18% -9.54% -15.90%
competitor
1
Source: Lyxor International Asset Management, as at 07/06/2018. Estimated performance is a forecast only and is not a reliable indicator of future results. Assumptions: Replication
cost for synthetic based on current market conditions. Replication cost for physical based on estimated index rebalance costs. TERs correct as at 07/06/2018..
*There remains uncertainty around the treatment of CGT on synthetic Luxembourg-domiciled ETFs tracking Indian equities. We recommend you seek information from your tax advisor.
The obtaining of the tax advantages or treatments defined in this document (as
the case may be) depends on each investor’s particular tax status, the jurisdiction
from which it invests as well as applicable laws. This tax treatment can be
modified at any time. We recommend to investors who wish to obtain further
information on their tax status that they seek assistance from their tax advisor.
*For illustrative purposes only. Examples are correct as of 30/04/2018.Knowing your risk
It is important for potential investors to evaluate the general Underlying risk
risks described below and in the fund prospectus on our The Underlying index of a Lyxor ETF may be complex and volatile. For example,
when investing in commodities, the Underlying index is calculated with reference to
website www.lyxoretf.com
commodity futures contracts exposing the investor to a liquidity risk linked to costs
such as cost of carry and transportation. ETFs exposed to Emerging Markets carry
Capital at risk a greater risk of potential loss than investment in Developed Markets as they are
ETFs are tracking instruments: Their risk profile is similar to a direct investment in exposed to a wide range of unpredictable Emerging Market risks.
the Underlying index. Investors’ capital is fully at risk and investors may not get back
the amount originally invested. Currency risk
ETFs may be exposed to currency risk if the ETF is denominated in a currency
Replication risk different to that of the Underlying index they are tracking. This means that exchange
The fund objectives might not be reached due to unexpected events on the rate fluctuations could have a negative or positive effect on returns.
underlying markets which will impact the index calculation and the efficient fund
replication. Liquidity risk
Liquidity is provided by registered market-makers on the respective stock exchange
Counterparty risk where the ETF is listed, including Société Générale. On exchange, liquidity may
With synthetic ETFs, investors are exposed to risks resulting from the use of an OTC be limited as a result of a suspension in the underlying market represented by the
swap with Société Générale. In-line with UCITs guidelines, the exposure to Société Underlying index tracked by the ETF; a failure in the systems of one of the relevant
Générale cannot exceed 10% of the total fund assets. Physically replicated ETFs may stock exchanges, or other market-maker systems; or an abnormal trading situation
have counterparty risk if they use a securities lending programme. or event.
Important information
This communication is exclusively directed and available to Institutional Investors subscribe, or invest into this product. This document together with the prospectus
as defined by the 2004/39/EC Directive on markets in financial instruments acting and/or more generally any information or documents with respect to or in connection
for their own account and categorised as eligible counterparties or professional with the Fund does not constitute an offer for sale or solicitation of an offer for
clients. This communication is not directed at retail clients. This document is issued sale in any jurisdiction (i) in which such offer or solicitation is not authorized, (ii) in
by Lyxor International Asset Management (LIAM), a French management company which the person making such offer or solicitation is not qualified to do so, or (iii)
authorized by the Autorité des marchés financiers and placed under the regulations to any person to whom it is unlawful to make such offer or solicitation. In addition,
of the UCITS (2009/65/EC) and AIFM (2011/61/EU) Directives. Société Générale is a the shares are not registered under the U.S Securities Act of 1933 and may not be
French credit institution (bank) authorised by the Autorité de contrôle prudentiel et directly or indirectly offered or sold in the United States (including its territories or
de résolution (the French Prudential Control Authority). possessions) or to or for the benefit of a U.S Person (being a “United State Person”
within the meaning of Regulation S under the Securities Act of 1933 of the United
Some of the funds described in this brochure are investment companies with
States, as amended, and/or any person not included in the definition of “Non-United
Variable Capital (SICAV) incorporated under Luxembourg Law, listed on the
States Person” within the meaning of Section 4.7 (a) (1) (iv) of the rules of the
official list of Undertakings for Collective Investment, authorised under Part I of
U.S. Commodity Futures Trading Commission). No U.S federal or state securities
the Luxembourg Law of 17th December 2010 (the “2010 Law”) on Undertakings
commission has reviewed or approved this document and more generally any
for Collective Investment in accordance with provisions of the Directive 2009/65/
documents with respect to or in connection with the fund. Any representation to the
EC (the “2009 Directive”) and subject to the supervision of the Commission de
contrary is a criminal offence. This document is of a commercial nature and not of
Surveillance du Secteur Financier (CSSF). These funds are sub-funds of either
a regulatory nature. This document does not constitute an offer, or an invitation to
Multi Units Luxembourg or Lyxor Index Fund and have been approved by the CSSF.
make an offer, from Société Générale, Lyxor Asset Management (together with its
Alternatively, some of the funds described in this document are sub-funds of Multi
affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the
Units France a French SICAV incorporated under the French Law and approved by
product referred to herein. These funds include a risk of capital loss. The redemption
the French Autorité des marchés financiers. Each fund complies with the UCITS
value of this fund may be less than the amount initially invested. The value of this
Directive (2009/65/CE), and has been approved by the French Autorité des marchés
fund can go down as well as up and the return upon the investment will therefore
financiers. Société Générale and Lyxor AM recommend that investors read carefully
necessarily be variable. In a worst case scenario, investors could sustain the
the “risk factors” section of the product’s prospectus and Key Investor Information
loss of their entire investment. This document is confidential and may be neither
Document (KIID). The prospectus and the KIID are available in French on the
communicated to any third party (with the exception of external advisors on the
website of the AMF (www.amf-france.org). The prospectus in English and the KIID
condition that they themselves respect this confidentiality undertaking) nor copied in
in the relevant local language (for all the countries referred to, in this document
whole or in part, without the prior written consent of Lyxor AM or Société Générale.
as a country in which a public offer of the product is authorised) are available free
The obtaining of the tax advantages or treatments defined in this document (as the
of charge on lyxoretf.com or upon request to client-services-etf@lyxor.com. The
case may be) depends on each investor’s particular tax status, the jurisdiction from
products are the object of market-making contracts, the purpose of which is to
which it invests as well as applicable laws. This tax treatment can be modified at any
ensure the liquidity of the products on NYSE Euronext Paris, Deutsche Boerse (Xetra)
time. We recommend to investors who wish to obtain further information on their tax
and the London Stock Exchange, assuming normal market conditions and normally
status that they seek assistance from their tax advisor. The attention of the investor
functioning computer systems. Units of a specific UCITS ETF managed by an asset
is drawn to the fact that the net asset value stated in this document (as the case
manager and purchased on the secondary market cannot usually be sold directly
may be) cannot be used as a basis for subscriptions and/or redemptions. The market
back to the asset manager itself. Investors must buy and sell units on a secondary
information displayed in this document is based on data at a given moment and may
market with the assistance of an intermediary (e.g. a stockbroker) and may incur
change from time to time. Authorizations: Lyxor International Asset Management
fees for doing so. In addition, investors may pay more than the current net asset
(Lyxor AM) is a French management company authorized by the Autorité des
value when buying units and may receive less than the current net asset value when
marchés financiers and placed under the regulations of the UCITS (2009/65/EC)
selling them. Updated composition of the product’s investment portfolio is available
and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution
on www. lyxoretf.com. In addition, the indicative net asset value is published on
(bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French
the Reuters and Bloomberg pages of the product, and might also be mentioned on
Prudential Control Authority.
the websites of the stock exchanges where the product is listed. Prior to investing
in the product, investors should seek independent financial, tax, accounting and
legal advice. It is each investor’s responsibility to ascertain that it is authorised to
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