International ETFs: A Beginner’s Guide

If your entire portfolio sits in Indian stocks, you’re essentially playing all your cricket matches on just one pitch. Some seasons it works brilliantly. But what happens when the pitch doesn’t suit your game?

That’s what international ETFs solve. They let you spread your money across global markets. The US, Europe, China while buying and selling right here on the NSE and BSE. No foreign brokerage account needed. No wiring dollars abroad. One trade on your regular demat account, and you own a piece of the world’s biggest companies.

Let’s break down what international ETFs are, why they matter, and how you can start using them.

What Exactly Is an International ETF?

An ETF, or Exchange-Traded Fund, is a basket of securities that tracks an index. A domestic ETF might track the Nifty 50. An international ETF does the same thing but with a foreign index.

So when you buy a unit of, say, the Motilal Oswal Nasdaq 100 ETF, you effectively own a small slice of 100 of America’s biggest non-financial companies Apple, Microsoft, Amazon, Alphabet bundled into one trade.

These funds are listed on Indian stock exchanges and trade in rupees. Most are passively managed the fund manager doesn’t actively pick stocks. The ETF simply replicates the index it follows. This keeps costs low, with expense ratios often below 0.5% to 0.6%.

Why Should Indian Investors Care?

There are a few solid reasons to look beyond India.

1. Geographic diversification reduces risk. If the Indian economy slows down due to a policy shock, a weak monsoon, or trade disruptions your entire portfolio takes a hit when it’s 100% domestic. International ETFs act as a cushion. When one market underperforms, another may hold steady or rise. Spreading your bets across geographies has historically reduced volatility over the long run.

2. Access to sectors that barely exist in India. India’s stock market is strong in IT services, banking, and pharma. But artificial intelligence hardware, semiconductors, cloud computing, and biotech the biggest players are listed in the US and East Asia. International ETFs give you a seat at that table without buying individual foreign stocks through complicated routes.

3. Currency diversification works quietly in your favour. When you hold an international ETF, your returns are partly influenced by the rupee-dollar exchange rate. If the rupee weakens against the dollar which has been the long-term trend your ETF returns get a small boost when converted back to rupees. This isn’t the primary reason to invest globally, but it’s a useful side benefit.

4. Valuation difference. Indian markets often trade at higher price-to-earnings (P/E) ratios compared to developed markets. You might be paying more per rupee of earnings for Indian stocks than for US or European stocks. International ETFs let you tap into markets offering better value at certain times.

What Types of International ETFs Are Available in India?

You’ll find a growing list of options on the NSE and BSE. They broadly fall into these categories:

1. US-focused ETFs. These are the most popular among Indian investors. Funds tracking the Nasdaq 100 or the S&P 500 dominate this space the Motilal Oswal Nasdaq 100 ETF and the Mirae Asset S&P 500 Top 50 ETF are well-known examples. They give you exposure to America’s largest companies.

2. Regional or country-specific ETFs. Some ETFs focus on a single country or region for instance, there are ETFs tracking the Hang Seng index (Hong Kong/China). These are more concentrated bets and carry higher risk, but they work if you have a specific view on a particular economy.

3. Thematic or sectoral ETFs. A newer breed of international ETFs focuses on themes like global technology, electric vehicles, or clean energy. The Mirae Asset NYSE FANG+ ETF, for example, targets the biggest US tech names. These are narrower in scope but can deliver strong returns if the theme plays out.

What Are the Risks?

No investment is one-sided, and international ETFs come with their own set of challenges.

1. Currency risk. The rupee-dollar movement that can help you can also hurt you. If the rupee strengthens against the dollar, your international ETF returns shrink when converted back. This is a double-edged sword.

2. Regulatory limits. SEBI and the RBI have capped how much Indian mutual fund houses can invest overseas USD 7 billion for the entire industry, with a separate USD 1 billion cap for overseas ETFs. In early 2022, SEBI halted new subscriptions in many international schemes because the industry hit this ceiling. While partially reopened since, inflows can be paused again if the cap is breached.

3. Geopolitical and economic risk. When you invest in a foreign market, you take on that country’s political and economic risks. A US recession, a trade war, or regulatory changes in China can directly impact your ETF’s value.

4. Liquidity and tracking error. Some international ETFs in India don’t have very high trading volumes. Low liquidity means wider bid-ask spreads, which increases your transaction cost. And tracking error the gap between the ETF’s return and the index’s return can be higher for international ETFs due to time zone differences and currency conversion costs.

How Do You Start Investing?

Getting started is straightforward.

1. You need a demat and trading account with any SEBI-registered broker. If you already trade Indian stocks, you’re set. International ETFs are listed on the NSE and BSE, so you buy them just like you’d buy shares of Reliance or TCS.

2. Pick your ETFs thoughtfully. Start with broad-based options like S&P 500 or Nasdaq 100 trackers for general US exposure. Check the expense ratio, tracking error, and daily trading volume before committing. Higher liquidity usually means tighter spreads and easier exits.

3. Decide on allocation. A common starting point is 10% to 20% of your overall equity portfolio in international ETFs. You can go higher based on your conviction, but don’t over-allocate at the expense of your core Indian holdings. The idea is diversification, not replacement.

4. Think long-term. International ETFs work best over five-year or longer horizons, where diversification benefits and currency gains compound meaningfully.

A Quick Note on Taxation

International ETFs listed in India are often taxed differently from domestic equity ETFs. Most don’t meet the 65% Indian equity threshold, so they may be taxed as debt funds meaning short-term gains (held less than two years) are taxed at your income tax slab rate. Tax rules here have been evolving, so check the specific treatment of the ETF you’re considering. Consulting a tax professional before making large allocations is sensible.

To Sum Up

International ETFs are one of the simplest ways for Indian investors to go global without leaving the comfort of their trading screen. They offer geographic diversification, access to sectors India lacks, and a natural hedge against rupee depreciation. The risks currency swings, regulatory caps, and geopolitical exposure are real but manageable with a long-term approach.

If you’re looking to put this into practice, start small. Pick one broad-based international ETF an S&P 500 or Nasdaq 100 tracker makes a sensible first step. Allocate a modest percentage of your equity portfolio and increase it gradually as you get comfortable. The goal isn’t to chase returns from the latest hot market. It’s to build a portfolio that doesn’t depend on just one country’s fortunes.