Diversified passive funds should form core of global investment portfolio

Exposure to mid-cap oriented and concentrated offerings should be taken later as part of exposure, say experts.

After a sustained bull run, the US stock market has slowed down due to fears about inflation, rate hikes, and the spread of the Omicron variant of Covid-19. Nonetheless, to tap Indian investors’ desire to diversify into the US markets, Motilal Oswal Mutual Fund has launched one more option: Motilal Oswal Nasdaq Q50 (MQ50) Exchange Traded Fund (ETF). Several US-focused passive options based on the S&P 500, S&P 500 Top 50, Nasdaq 100, and NYSE Fang+ indexes are already available.

Investing in tomorrow’s leaders

The MQ50 ETF comprises 50 stocks that come after the 100 stocks of the Nasdaq 100 in terms of market cap. It offers exposure to midcap stocks that are innovators and future leaders of the US markets.

“Investors who have exposure to the Nasdaq are taking concentrated bets on some of the best and biggest names in global tech. But a lot of future growth will come from smaller companies,” says Pratik Oswal, head of passive funds, Motilal Oswal Asset Management Company. Apple, for instance, has a market cap of close to $3 trillion.

“Going from there to $6-7 trillion over the next three-five years will be a lot harder than for a smaller firm in this index to double its market cap. Nasdaq Q50 gives access to midcap opportunities in growth-oriented industries like technology, consumer, healthcare, and so on,” he says.

Is US diversification necessary?

With the Indian market offering sizzling returns over the past 18 months, many investors wonder if they should invest abroad, especially in the US. The answer, according to experts, is yes—for diversification and to lower portfolio risk. “The US economy has recovered strongly in the past few quarters. Demand is strong. Inflation with growth is usually healthy for equity markets. Investors should diversify into the US markets,” says Rahul Jain, president and head-personal wealth, Edelweiss Wealth Management.

Oswal believes investing in the US market is akin to global diversification. “The top 15-20 stocks (where most of an investor’s money will be held in market-cap weighted indexes) have globally strong business models, little balance sheet leverage, strong cash flows, and ability to pass on higher prices to customers. The fate of the S&P500 is not as dependent on the US economy as earlier,” says Oswal.

Choose the right index

If you have just started investing in the US market, go with a diversified offering like the Motilal Oswal S&P500 Index Fund. An abridged version of this index--Mirae Asset S&P 500 Top 50 ETF--invests in the top 50 stocks in the S&P500 index and may be considered as well.

Investors keen on high-tech exposure may consider the Nasdaq-100 based schemes available from Motilal Oswal, Kotak, ICICI Prudential and Aditya Birla Sun Life Asset Management Company (AMC). Tech stocks have 50.8 per cent weight in the Nasdaq 100.

Investors keen on investing in midcaps beyond the top 100 stocks on the Nasdaq may opt for the MQ50 ETF.

Concentrated passive offerings, such as the Mirae Asset Fang Plus ETF, are also available. These are for sophisticated investors and should not be an investor’s first choice.

Avoid active funds

Actively managed equity funds are best avoided when investing in the US market. “Passive funds are free of fund-manager bias and are cost-effective. The majority of active funds fail to beat their benchmarks in matured markets like the US, so stick to passive offerings,” says Harshad Chetanwala, co-founder, MyWealthGrowth.com.

Who should invest?

Investors who have a reasonable exposure to Indian equities, or have moderate to high-risk appetite, may invest in the US market. “Those who have just started investing in equities should stick to domestic equities. Only the more evolved ones should go for international investing,” says Jain.

Enter the US market with at least a seven-year horizon as markets could turn volatile in the short to medium term. “Take the systematic investment plan (SIP) route and avoid lump-sum investments,” says Chetanwala.