HDFC Developed World Indexes Fund of Fund Review

Published: September 17, 2021 at 8:36 am

Last Updated on December 29, 2021

HDFC Developed World Indexes Fund of Fund is an open-ended fund of funds scheme investing in units/shares of overseas Index Funds and/or ETFs, which will, in aggregate, track the MSCI World Index. The fund is currently in its NFO stage. In this review, we shall discuss HDFC MF’s plan to invest in a basket of ETFs to try and provide a  “return that closely corresponds to the performance of the MSCI World Index, subject to tracking errors, over the long term” and if makes sense to invest in NFO or put it in our watchlist.

What is the MSCI World Index? The MSCI World Index captures large and mid cap representation across 23 Developed Markets (DM) countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US.

The index has 1,557 constituents and covers approximately 85% of the free float-adjusted market capitalization in each country. According to the latest fact sheet, the top ten stocks are:

  • Apple 4.23% info tech
  • Microsoft corp 3.59% info tech
  • Amazon.Com 2.47% cons discr
  • Facebook a 1.51% comm srvcs
  • Alphabet a 1.44% comm srvcs
  • Alphabet c 1.42% comm srvcs
  • Tesla 0.94% cons discr
  • Nvidia 0.92% info tech
  • JPMorgan chase & co 0.81% financials
  • Johnson & johnson 0.76% health care

If you are wondering why this resembles a US stock index, this is the geographic distribution.


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    • United States 67.95%
    • Japan 6.63%
    • United Kingdom 4.11%
    • France 3.31%
    • Canada 3.2%
    • Other 14.8%

    At this point, if you are wondering if the MSCI World index is going to be this US-heavy, why can’t I just the S&P 500 directly? It is a perfectly rational line of thinking as we shall below.

     Where will the HDFC Developed World Indexes Fund of Fund invest?

    According to the fund presentation document, the fund of fund will invest in the following ETF and index funds.

    • CSIF (IE) MSCI USA Blue UCITS ETF 67.6% Benchmark: MSCI USA Index
    • CSIF (Lux) Equity Europe (index fund)  19.1%. Benchmark: MSCI Europe Index
    • CSIF (Lux) Equity Japan (index fund)  6.6% Benchmark: MSCI Japan Index
    • CSIF (Lux) Equity Pacific Ex Japan (index fund)  3.3%. Benchmark: MSCI Pacific ex Japan Index
    • CSIF (Lux) Equity Canada (index fund)  3.3%. Benchmark: MSCI Canada Index

    The aggregate performance of this basket is expected to follow the MSCI World Index. The US ETF is domiciled in Ireland – AMC says this is because the withholding tax on dividends is only 12.5% in Ireland instead of the usual 25%. The index funds are domiciled in Luxembourg.

    To say the very least, this constitution is bizarre. If the aim was to provide a return close to the MSCI World index and reduce the withholding tax on US stock dividends, HDFC AMC could have chosen an ETF or index track fund directly tracking the MSCI World Index domiciled in Ireland! There are nine such ETFs listed here: MSCI World ETFs.

    Building a fund of fund that will invest in four passive funds, each with a different benchmark, domiciles in two locations but overall tracking another benchmark is baffling.

    MSCI World Index vs S&P 500

    The next question to ask is, what is so special about investing in 23 developed markets? I can understand if the index has got more or less equal weightage among all developed regions. We can claim true international diversification even if it does not result in returns.

    That is clearly not the case. Also, the way the world order is structured right now, at least the top few stocks of the S&P 500 have a truly international presence. So am I going to get anything extra if I choose HDFC Developed World Indexes Fund of Fund instead of the Motilal Oswal S& P 500 Index fund or the Mirae Asset S&P 500 Top 50 ETF or FOF (click the links to read reviews)?

    These are the ten-year rolling returns of MSCI World Index TRI (aka Gross total return) compared with the S&P 500 TRI. Both indices are in USD.

    Ten-year rolling returns of MSCI World Index TRI compared with the S and P 500 TRI
    Ten-year rolling returns of MSCI World Index TRI compared with the S and P 500 TRI.

    Even if we account for dividend withholding tax – the full amount for the S&P 500 and half for the MSCI World index fund when invested via HDFC Developed World Indexes Fund of Fund – there is not much difference in returns between the two indices. The reason is likely to be US dominance in the MSCI World index.

    So there is nothing extraordinary about the HDFC Developed World Indexes Fund of Fund. Its setup is both messy and unnecessary.  We recommend investors avoid it, at least for the time being. The tracking error of this fund of fund would be of interest after it turns one year old. We had recently published that the Tracking errors of MO S&P 500 Index fund, MO Nasdaq 100 ETF and FoF are quite huge. Let us see how this HDFC fund and another new offer, Mirae Asset S&P 500 Top 50 ETF and FOF, fare in comparison. One can then take a call on this HDFC fund.

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