Why Is It a Smart Choice to Invest in US ETFs?

The first mantra of successful investing is to develop a diversified portfolio. To have an optimally diversified portfolio is to add international assets besides investing in Indian equities. Such a decision helps you to reduce the risks of portfolio volatility and boost returns. In addition, it is an opportunity to invest in some of the biggest names in the world such as Amazon, Meta, and Google.

Indian markets do not always run parallel to international conditions. Therefore, owning both domestic and international securities can effectively level out portfolio volatility and present you with access to growth opportunities across borders.  

Of course, you would like to know how you can invest in international stocks, fixed income, plus other asset classes. Picking the right investment, especially in the international context, may seem like a daunting task because you might lack the right resources or skill sets to do so.

This is precisely the reason why ETFs or Exchange Traded Funds come to be useful. They happen to be one of the most exciting and intelligent investment options for the Indian investor. An ETF represents a single security, comprised of a basket of stocks, bonds (or a mix of both), and currencies. A single ETF may consist of hundreds of stocks and is a relatively inexpensive method to build your portfolio. ETFs take the guesswork out of investments, offering easy liquidity.  

Usually, ETFs are under passive management, as they are designed to pursue a particular index such as the S&P 500 or the S&P CNX Nifty. However, you can also find actively managed ETFs.   

Historically speaking, the US stock market indices are comparatively less volatile than Indian benchmark indices such as Sensex or Nifty. Apart from that, most of the major leading global corporations are US-based and listed on bourses. Such opportunities present a feasible argument in favor of US ETFs.  

You have two choices to invest in ETFs that have exposure to US stocks. Firstly, you can invest in ETFs that are listed in India but are invested in US stocks based on different criteria. The other method is to invest directly in US ETFs that are listed on US bourses.  

It is very easy to guess your thoughts. When you have access to international ETFs in India, why should you bother to invest directly in US ETFs?  

It’s a valid question, but there is a strong justification in favor of US ETFs.  

A prime reason for investing directly in US ETFs is the availability of a wide variety of options compared to the Indian market. While India has about 160 ETFs, US bourses have more than 2000 ETFs enlisted. So, your investment choices can expand to more than ten times if you are opting to invest in US ETFs directly.

An increased number of choices means that you get access to investment themes that are otherwise unavailable in the Indian scenario. Let’s have a look.  

You can choose from a variety of fixed-income ETFs providing apt exposure to investment-grade US bonds. This option can be especially suitable for the conservative investor.  

Sustainable investors, inclined to grow their wealth, while protecting the environment have access to a variety of sustainable ETFs, including those that are ranked high on the ethical scale. In India, none of the ETFs or ESG funds offer options if an investor wants to withdraw from investing in oil and gas companies. However, in the US market, you have access to ESG funds such as UBS ETF (IE) S&P 500 ESG ELITE UCITS ETF, tracking the S&P 500 ESG Elite index.  

These funds effectively exclude companies involved in fossil fuels, tobacco, nuclear power, small arms, military contracting, controversial weapons, adult entertainment, gambling, alcohol, predatory lending, GMO and palm oil companies, or companies having a poor United Nations Global Compact (UNGC) score. A fund like the Rize Environmental Impact ETF focuses on companies that are taking an active role in creating a greener world.

Furthermore, investors looking for sustainable companies beyond the US or India have access to international ETFs. Examples include the MSCI Japan Socially Responsible UCITS ETF  and the Lyxor MSCI Europe ESG Leaders (DR) UCITS ETF. The first one lets you invest in Japanese companies prioritizing social responsibility and the second one lets you invest in leading ESG companies in Europe.

Investors who intend to profit from the unique spending habits of millennials and Gen Z have access to options such as the Global X Millennial Consumer ETF.

US bourses have several ETFs that are focused on a renewable energy future, allowing you the opportunity to support these noble causes. For instance, the VanEck Low Carbon Energy ETF maintains a list of holdings comprised of wind, solar, hydropower, biofuel, hydrogen, or geothermal technology companies.  

Many people in India live on a vegetarian diet. Ethical investors such as Jains often look for investment options that follow non-violence principles. Such funds are unfortunately unavailable in India. However, in the US, there are funds such as the Vegan Climate ETF that allow you to grow your wealth without compromising on moral values.

Almost anyone would be interested in the growth of popular US stocks like the FANG. However, if you are looking for advanced tech stocks, you can find ETFs like ARK Innovation ETF. This fund specifically focuses on advanced sectors of scientific research such as DNA technology, and shared infrastructure, along with industrial innovation in energy, automation, and manufacturing.  

Investors who believe that the cryptocurrency fever is here to stay but would still not want to expose themselves to the market volatility of the crypto economy can invest in the Amplify Transformational Data Sharing ETF. The fund lets you invest in companies that develop blockchain technologies. In this way, you can still profit from the crypto rage without actual exposure to digital currencies.  

These are only a few examples of different investment themes that would be accessible to you if you want to diversify to US ETFs. Apart from these, there are various other themes such as ETFs focusing on gender equality, sustainable food industry, international emerging markets, small-cap stocks, cybersecurity (First Trust NASDAQ Cybersecurity ETF), or investing in countries that rank higher in democratic governance (Democracy International Fund ETF).  

Since the US ETF market is very competitive, you can find these at very low costs. 

Your investment decision is up to you. Many investors are interested directly in US ETFs Your decision will depend on your risk appetite and how confident you are in accessing new territories.

Investing in Indian ETFs with US exposure is more convenient as additional paperwork is not needed. However, if you plan to invest in ETFs directly listed in the US, you will have to set up a new account with an international broker and complete the KYC. Initially, this may seem inconvenient, but this decision is a one-time exercise that opens up a world of new investment opportunities.