The role of Indian equity exchange-traded funds in diversified portfolios: a risk-adjusted performance analysis

D. K. Malhotra and Rahul Singh

Journal of Investment Strategies

Abstract: This study evaluates the performance and portfolio role of US-domiciled, US dollar-denominated Indian equity exchange-traded funds (ETFs) relative to US and global benchmarks between April 2008 and August 2023. Using return-based measures, multifactor models and portfolio optimization techniques, we examine both standalone performance and the contribution of Indian ETFs within diversified allocations. The results show that Indian equity ETFs underperform US and global equities on a risk-adjusted basis, with higher volatility and no statistically significant alpha. Their performance improved during the Covid-19 pandemic and postvaccination periods, though gains proved temporary. Portfolio tests reveal that when paired with US equities the Indian ETFs reduce efficiency, with Sharpe-maximizing allocations assigning zero weight to Indian equity ETFs. By contrast, modest allocations to Indian equity ETFs enhance diversification when paired with non-US global equities, and risk-parity approaches ascribe nearly one-third weight to Indian equity ETFs. Measures of tail risk (value-at-risk, conditional value-at-risk) indicate that Indian ETFs have significantly higher tail risk, strengthening the argument for their use on a limited basis. The study finds that Indian equity ETFs are best used as satellite exposures that provide conditional diversification benefits to global portfolios, rather than as sources of consistent alpha or core efficiency.

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