Investors in the iShares MSCI India ETF (INDA) might be surprised to learn that a hidden cost, Indian capital gains taxes, consistently erodes their annual returns. BlackRock iShares itself acknowledges this discrepancy on its fund pages, stating that the fund's performance can diverge from its benchmark due to these accrued taxes, which are not reflected in the index's calculations. Over a decade ending September 30, 2026, INDA's net asset value (NAV) returned 5.96% annually, while the MSCI India Index achieved 7.20% per year. This persistent shortfall is a direct consequence of taxes paid within the fund, an expense that bypasses traditional fee disclosures and investor tax forms.
Detailed Analysis of INDA's Underperformance Against Its Benchmark
The pattern of INDA trailing its index is not an isolated incident; it's a consistent trend observed across various timeframes. For instance, in the three-year period leading up to September 30, 2026, the fund delivered an average annual return of 2.07%, notably lower than the index's 2.79%. Over five years, the fund's return stood at 0.61% compared to the index's 1.50%. Since its inception, INDA has recorded a 5.26% return, falling short of the index's 6.30%. Calendar year results further illustrate this steady divergence: in 2021, INDA returned 22.41% versus the index's 26.23%; in 2022, -9.38% against -7.95%; in 2023, 17.49% compared to 20.81%; in 2024, 8.99% versus 11.22%; and in 2025, 2.47% against 2.62%. This consistent gap highlights the ongoing impact of these internal taxes.
The fundamental reason for this disparity lies in the nature of an index versus an actual investment vehicle. A benchmark index exists purely as a theoretical construct; it neither buys nor sells shares, thus incurring no capital gains taxes. Consequently, it never owes the Indian government any tax rupees. In contrast, INDA operates as a real investment fund, actively trading Indian stocks, which subjects it to India's capital gains tax regime. This means that as INDA realizes gains from its stock transactions, a portion is paid in taxes to India.
These capital gains taxes are paid directly by the fund, as specified in BlackRock Fund Advisors' investment advisory agreement. While BlackRock covers most operating expenses, taxes are explicitly listed as an exception. This arrangement means that shareholders indirectly bear the cost, as these tax payments are deducted from the fund's overall assets, reducing the net asset value before any returns are distributed to investors.
While taxes are a significant contributor to the performance gap, they are not the sole factor. BlackRock iShares also identifies other elements that lead to tracking error, such as the fund's 0.61% expense ratio, transaction costs associated with buying and selling securities, uninvested cash reserves, and discrepancies in valuation timings. Recent performance figures underscore these pressures, with INDA reporting a year-to-date NAV return of -13.81% as of October 26, 2026, managing net assets of $5,830.68 million across 165 holdings.
This issue isn't unique to INDA; all funds that directly invest in Indian equities are subject to India's capital gains taxes. The Franklin FTSE India ETF (NYSEARCA:FLIN) serves as another example. While investors can choose alternative funds with different fee structures or tracking methodologies, the underlying tax obligation from India remains constant. Despite these tax implications, INDA has continued to generate positive long-term returns, and BlackRock transparently communicates these costs.
Investor Insights: Navigating International ETF Investments
For current and prospective INDA holders, it's crucial to evaluate the fund's performance not just against a theoretical index, but against the realistic returns an investor in India could achieve after accounting for local taxes. A minor difference in annual returns is often an inherent cost of gaining exposure to international markets through a U.S.- domiciled fund. Before committing to any single-country fund, thorough due diligence is advised. Always consult the fund's official page to review its expense ratio and any specific notes regarding local capital gains taxes. These details offer a more accurate picture of the expected performance gap than simply comparing against an untaxed index, enabling investors to make more informed decisions about their global portfolios.
