Balance Better with U.S. ETFs

The Indian market may appear quiet right now, but true wealth creation extends far beyond Dalal Street. As Wall Street surges ahead and the rupee works to keep pace, global diversification has shifted from being optional to essential. Investing through U.S.-based funds or ETFs offers Indian investors access to global powerhouses in technology, healthcare, and consumer sectors. This article explains why adding a slice of America to your portfolio could be the smartest move towards building a truly world-class investment strategy [EasyDNNnews:PaidContentStart]

A World Beyond Dalal Street
The scoreboard of the past year tells its own story. While the Sensex slipped into marginal red with a -0.2 per cent return, Wall Street’s giants sprinted ahead; NASDAQ rocketed 25.6 per cent, the S&P 500 advanced 16.8 per cent, and even the staid Dow Jones gained 10.4 per cent. For Indian investors, the message is clear: home markets do not always deliver, and the world’s biggest opportunities are often playing out thousands of miles away. That is where U.S. ETFs step in, offering a ticket to global growth, tech innovation, and portfolio resilience.

Indian retail investors have traditionally focused on domestic equities and Mutual Funds, partly due to familiarity and regulatory ease. The U.S. equity market, home to many of the world’s largest and most innovative companies, has delivered robust returns and offers exposure to sectors under-represented in India.

When it comes to diversification, the numbers reveal something Indian investors often overlook: the Sensex does not always move in lockstep with Wall Street. Over the last decade, the correlation between India’s benchmark index and its American counterparts has been surprisingly modest. The Sensex’s 10-year correlation with the Dow Jones stands at just 0.28, with the S&P 500 at 0.28, and the NASDAQ even lower at 0.23. In plain language, that means only about a quarter of the time do these markets dance to the same tune.

Zoom in to the last three years, and the connection becomes even weaker. The Sensex’s correlation with the Dow slips to 0.11, with the S&P 500 and NASDAQ hovering around 0.12. Put differently, while Indian investors were grappling with domestic market swings, Wall Street was charting its own course. This disconnect is not a bug—it is a feature. It means that adding U.S. exposure is not about duplication, it is about insulation.

The median values underscore this consistency: around 0.18 to 0.19 for the long run, and roughly 0.15 to 0.18 in the short run. These are low enough to make a real difference in portfolio Construction. For investors, that is the essence of diversification: while India may be stumbling, the U.S. might be sprinting—and holding both ensures your wealth does not get tied to a single economic rhythm.

Correlation Graph

Low correlation is not just a statistic tucked away in research notes—it has real consequences for investors’ wallets. Imagine two runners in a relay. If both stumble at the same time, the race is lost. But if one falters while the other surges, the baton keeps moving. That is exactly what happens when you combine Indian equities with U.S. markets in a portfolio.

Take a simple example: an investor who put all their money into the Sensex over the last year would have earned almost nothing—returns hovering around flat, even dipping negative at times. Now consider a blended portfolio: 70 per cent in the Sensex and 30 per cent in the S&P 500. That mix would have softened the blow of India’s underperformance and captured the upside from Wall Street’s rally. Instead of staring at -0.2 per cent, the investor could have been looking at a healthy single-digit positive return of 8.4 per cent.

Increase the allocation to the high-flying NASDAQ, and the picture looks even better—the portfolio rides India’s growth story while piggybacking on America’s tech boom and portfolio returns would have been 12.8 per cent.

The beauty of this approach lies in its rhythm. India’s markets have their own cycles, fuelled by domestic consumption, government spending, and demographic dividends. The U.S., meanwhile, is driven by innovation, global demand, and dollar dominance. Rarely do both move in perfect sync, and that is precisely the point. By holding both, the long-term investor ensures smoother returns, fewer sleepless nights, and a better chance of compounding wealth steadily rather than enduring the feast-or-famine swings of betting on a single market.

Why U.S. Exposure Enhances Diversification for Indian Investors
Low Correlation Reduces Risk
■ Low historical correlation: Yearly returns of the Sensex and DJIA show a correlation of 0.28 over 10 years, falling to 0.11 in recent years. Similarly, the correlation between MSCI India and U.S. equities is 0.51, indicating that U.S. stocks often behave differently from Indian markets. Lower correlation means combining Indian and U.S. assets can reduce overall portfolio volatility.
■ Different sector exposures: The Sensex is dominated by financials and energy which together constitute almost 40 per cent weightage, while the S&P 500 and NASDAQ are tilted toward technology. This sectoral divergence reduces the risk of having all eggs in one basket. The U.S. also offers exposure to consumer technology giants, healthcare innovators, and cloud-computing leaders— segments largely absent in India.
■  Valuation and size differences: U.S. equities trade at more moderate valuations compared to Indian equities if we consider the earnings growth, and the U.S. market capitalization is roughly half of all the world equity market capitalization. Adding U.S. assets gives investors exposure to a larger, more liquid market.

Universe of U.S.‑Focused ETFs and Mutual Funds Available to Indians
Indian investors can access U.S. equities through domestically listed Exchange Traded Funds (ETFs), Fund of Funds (FoFs) that invest in offshore ETFs, and actively managed schemes. The following tables summarise key options, their performances and costs. Returns are as of mid‑2025.
■ Higher dispersion among active funds: Returns vary widely. Axis Global Equity Alpha FoF and Franklin U.S. Opportunities have delivered strong multi-year returns, while PGIM India Global Equity Opportunities has lagged over five years. Expense ratios also differ; some FoFs exceed 1.5 per cent, reducing net returns.
■ Passive ETFs remain cost-efficient: Motilal Oswal S&P 500 Index Fund and Invesco EQQQ FoF have expense ratios below 0.7 per cent and have delivered competitive returns, particularly given the sharp rally in U.S. tech. Investors who prefer simple index exposure can opt for these.
■ Concentration risk in thematic funds: The FANG+ FoF delivered spectacular one-year returns (80.97 per cent) but invests in only ten companies, amplifying volatility. Such funds suit aggressive investors comfortable with tech concentration.

Currency Risk and Rupee Exposure
Of course, investing across borders is not just about indices and growth stories; there is a silent player in the game: currency. When Indian investors buy U.S. ETFs or international mutual funds, they are not only exposed to stock market movements but also to the rupee–dollar exchange rate.

Here is why it matters. If the rupee weakens against the dollar—a fairly common trend over the past two decades—the gains from U.S. investments get an extra kicker. For instance, even if the S&P 500 delivers a modest 10 per cent return in dollar terms, a 3–4 per cent depreciation in the rupee can push the investor’s return closer to 13–14 per cent in rupee terms. It is like having an invisible tailwind at your back.

But the reverse is also true. If the rupee strengthens, the currency can eat into returns, sometimes turning a profitable U.S. bet into a flat or even negative outcome in local currency. While history suggests that the rupee has generally trended weaker against the dollar—sliding from around ₹45 per dollar in 2010 to over ₹88 today—short-term movements can be unpredictable.

Over the 14-year period from 2010 to 2024, the S&P 500 has grown by approximately 380 per cent, while the Nifty hasdelivered around 350 per cent. However, for Indian investors, this gap widens significantly once the impact of currency depreciation is factored in. The Indian rupee has depreciated by roughly 3.5 per cent annually against the U.S. dollar over the past two decades. In the last five years alone, the U.S. dollar has appreciated by about 15 per cent against the rupee. As a result, when returns are adjusted for INR conversion, the S&P 500 has delivered substantially stronger rupee-based gains than domestic indices.

For investors, the key is perspective. Currency risk is not a reason to shy away from international funds; it is a reminder to treat them as long-term holdings. Over time, the gradual depreciation of the rupee tends to work in favour of global allocations, making U.S. ETFs not just a play on the world’s most innovative companies, but also a hedge against India’s currency losing ground.

Tax Implications for Indian Investors
Under the revised provisions announced in Budget 2024, the taxation of overseas mutual funds, international equity ETFs, and foreign equities has undergone a significant shift. Since they invest less than 65 per cent of their assets in Indian equities, they are categorised similarly to Debt Funds for tax purposes. Long-term capital gains (LTCG) on such investments are now taxed at a flat rate of 12.5 per cent, without the benefit of indexation. To qualify as long-term, the holding period has been standardised to 24 months, meaning units held for more than two years are eligible for this concessional rate. Investments sold within 24 months continue to attract short-term capital gains (STCG) tax at the investor’s applicable income tax slab rate.

Unlike domestic equity mutual funds, the ₹1,25,000 annual exemption under Section 112A does not apply to overseas mutual funds or international ETFs. Additionally, any dividends received from these funds are taxable at the investor’s slab rate, and are often subject to foreign withholding tax, usually ranging between 10–25 per cent depending on the country of investment. However, Indian investors can claim foreign tax credit (FTC) under the relevant Double Taxation Avoidance Agreement (DTAA) when filing their income tax returns.

In essence, this update simplifies and standardises capital gains taxation across categories while bringing global investments closer to parity with domestic assets, although the lack of exemption and indexation slightly increases the effective tax outgo for long-term overseas investors.

How to Choose the Right U.S. ETF or Fund
Investors should consider the following factors when selecting U.S. exposure:
1. Investment objective and risk appetite: Broad indices like the S&P 500 or Nasdaq 100 offer diversified exposure, while thematic funds (FANG+, technology) concentrate on a few sectors. Aggressive investors seeking high growth may allocate to FANG+ or Nasdaq 100, whereas conservative investors might choose S&P 500 funds for stability.
2. Active versus passive: Active funds like Axis Global Equity Alpha FoF or Franklin U.S. Opportunities aim to outperform benchmarks but charge higher fees and can underperform. Passive funds typically have lower costs and deliver benchmark returns. Comparing historical performance and expense ratios is essential.
3. Expense ratio and tracking error: Lower expenses translate to higher net returns, especially over the long term. Passive ETFs with low tracking error (difference between fund and index performance) are preferable for cost-conscious investors.
4. Currency exposure: Funds denominated in dollars may benefit from rupee depreciation but can suffer when the rupee strengthens. Investors can choose hedged funds if available, though such options are limited in India.
5. Fund house and liquidity: Established fund houses with larger assets ensure better liquidity and governance. Always check AUM and track record.

Diversification Strategies for Indian Portfolios
There is no universal rule for international allocation within an equity portfolio, but many experts suggest dedicating around 5 per cent to 15 per cent of the total to global markets. For Indian investors, a structured approach works best. One can adopt a core–satellite strategy by allocating a portion of their portfolio to broad-based international indices for stable exposure, while using smaller allocations in thematic or actively managed options to capture growth opportunities.

Instead of investing all at once, a staggered approach through systematic investment plans or periodic lump-sum remittances can help smooth out market and currency fluctuations. It is also important to diversify beyond the U.S. market, as exposure to other developed regions and different currencies like the euro or yen can help reduce concentration risk tied to the dollar. Finally, investors should monitor performance and valuations periodically and rebalance their portfolios annually to maintain the desired allocation mix.

Conclusion – Bridging the Global Gap
The evidence is clear: U.S. ETFs deserve a strategic place in Indian portfolios. They provide access to the world’s largest companies, technology innovators and healthcare leaders, sectors that the Indian market does not fully capture. Historical data shows that adding U.S. assets reduces portfolio volatility due to low correlation and can enhance returns, especially during periods when domestic markets underperform. A thoughtful mix of passive and active U.S. funds, balanced with awareness of currency risk and tax implications, can help retail investors plug the global gap and build wealth in an increasingly interconnected world.

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