Monthly Fund Focus: Beyond AI and the US, an Indian equities ETF, and managing downside risk

David Stevenson argues the global equity rally is broadening beyond AI and the US, highlighting new opportunities across markets and sectors. He also examines a new Indian equities ETF, revisits HgCapital after its sell-off, and explores how funds can help investors manage downside risk.

In this month’s funds article, we examine whether the broad equity rally is spreading beyond AI and America – spoiler alert: it is! We also investigate an interesting new Indian equities ETF – Indian equities haven’t benefited so much from the recent rally in emerging markets stocks, but this new ETF could be useful if sentiment turns. I also reiterate why I believe the sell-off in HgCapital’s shares might be a good buying opportunity, and, last but by no means least, I try to answer one of the most frequent questions I get asked about investing in risky, volatile markets: Can you use funds to manage downside risk?

The Broadening trade

In my view, the key development in the markets so far in 2026 has been a rotation away from tech and AI stocks towards a much broader range of stocks. The chart below is very instructive: the black line is the S&P 500, the red line is the equal-weighted S&P 500, and the blue line is the S&P 400 Mid Cap Index. The chart shows the return since the beginning of 2025.

As you can see, for much of this period, the equal-weight version of the index consistently underperformed the mainstream index, while mid-cap stocks have fallen even further behind. The story has been obvious so far: mega-large-cap tech stocks have dominated returns due to the AI boom.

That changed towards the end of last year, and since the beginning of this year, we’ve seen a broadening of the bullish equity sentiment to include mid- and smaller-cap stocks.

And what’s true for non-AI US stocks is equally true for non-USA or Rest of World stocks.

I think the chart below is interesting tells the story very well. It shows an MSCI World ETF that excludes the US (in black) versus an MSCI World ETF that INCLUDES the US (in green). Notice how the US has consistently pulled ahead of the Rest of the world, excluding the US (RoW), in recent years, but since the beginning of this year, that has flipped – and the RoW is pulling ahead!

For me, the key conclusion is increasingly obvious: AI is starting to worry investors, and all those fears about concentration risk in the major AI companies are now, finally, registering. Investors globally are seeking out alternative pockets of opportunity, be that non-AI, non-tech sectors, or even, hold your breath…UK equities or emerging markets equities.

Indian equities

India is one emerging market that hasn’t participated in the recent global ex-US (RoW) stock rally. January was a dismal month for Indian equities as international investors abandoned the market, though domestic investors more than made up for the outflows. One driver behind the foreign exodus is valuation concerns. Compared to most other emerging markets, Indian equities still remain highly valued, standing at roughly 22 times historic earnings, although earnings are expected to rebound strongly in 2026 as the government’s massive infrastructure spending programme kicks in. Looking more to the long term, India should also benefit from some increasingly obvious macroeconomic tailwinds.

The macroeconomic argument for investing in India centres heavily on its favourable demographics and consumer-led growth. India surpassed China in 2022 to become the world’s most populous nation. Its demographic profile is characterised by a greater proportion of the working-age population, a trend expected to persist over the coming decades. In 2023, the median age in India was just 28, compared to 39 in China. Furthermore, private consumption is a major driver of the Indian economy, accounting for over 60% of its GDP. Over the past decade, the middle-class demographic expanded by over 14%, accompanied by a broader trend toward urbanization, rising affluence, and reduced poverty.

Beyond consumers, strategic government initiatives are bolstering the economy. The government has increased infrastructure funding for four consecutive years, with a $134 billion interim budget set for the 2024-2025 fiscal year. This heavy infrastructure spending is driving economic growth, improving transportation efficiency, and creating jobs. Additionally, the 2017 implementation of the Goods and Services Tax (GST) consolidated multiple tax laws into a single system. This pivotal reform resulted in significant revenue increases, empowered the manufacturing sector by lowering costs through the elimination of multiple tax layers , and paved the way for modern digital compliance reforms.

It is against this backdrop that a new exchange-traded fund (ETF) from WisdomTree is worth a closer look. In very simplistic terms, it screens the universe of Indian equities, focuses on stocks measured by their core profitability, and gives greater weight to mid- and small-cap stocks – and less prominence to large-cap stocks. The WisdomTree India Earnings UCITS ETF (EPI). EPI seeks to track the price and yield performance, before fees and expenses, of the WisdomTree India Earnings UCITS Index and has a Total Expense Ratio (TER) of 0.55%.

So, what’s interesting about this new ETF with the ticker EPI? While Indian equities are often criticised for consistently appearing overpriced relative to other fast-growing markets, the EPI fund aims to mitigate this by weighting its portfolio by company profits. We can see what this means in practical terms by looking at the US ETF that uses the exact same methodology – it has been around for a few years stateside.

This earnings-focused methodology results in lower price-to-earnings multiples for investors. Looking at the US version of the ETF, as of December 31, 2025, EPI offered a trailing Price/Earnings ratio of 18.42 compared to 23.95 for the MSCI India Index. The fund also showed a more attractive Price/Book ratio of 2.76 versus the benchmark’s 3.88, alongside a higher Dividend Yield of 1.57% compared to the benchmark’s 1.11%.

Finally, EPI offers significantly broader market exposure than, say, the MSCI India Index, which is more widely used by institutional investors. The fund holds 558 companies, vastly outnumbering the benchmark’s 164 holdings. Crucially, unlike the MSCI India Index, which has 0% exposure to small-cap stocks, EPI allocates 7.19% of its portfolio to small-cap equities. This distinct allocation grants investors access to rapidly growing companies within India’s domestic economy. The median market cap for the EPI ETF is $2 bn vs $12 bn for the more mainstream MSCI India index.

Selection Criteria for the index and ETF + Listed on the Indian National or Bombay (Mumbai) Stock Exchange + Incorporated in India + P/E ratio of at least 2 + FII limit not breached Market Capitalization/ Liquidity Requirements + Earn at least $5 million in the fiscal year prior to rebalance1 + Trade at least 250,000 shares per month for each of the 6 months + Median daily dollar volume of $200,000 for each of the 6 months + $200 million minimum market cap Holdings Caps/ Weight Adjustments + Sector Weights: 25% cap + Real Estate 15% Weighting and Rebalance + The Index is net income weighted1 + Reconstituted on an annual basis in September using market data as of the end of August.

PE is 18.4 vs 24

Dividend yield 1.57% vs 1.11%

ETF information

ETF name	TER	Exchange	Trading currency	Exchange code	ISIN
WisdomTree India Earnings UCITS ETF	0.55%	LSE	USD	EPI	IE000VCYXLY9
WisdomTree India Earnings UCITS ETF	0.55%	LSE	GBx	EPIP	IE000VCYXLY9

^[1] Source: WisdomTree as of 30 January 2026

² ETF refers to an exchange-traded fund

The SaaSpocalypse and why I’ve been topping up on HgCapital

In my column in the Daily Telegraph a few weeks ago, I explained why I think the SaaS sell-off is misguided – but not unsurprising. The key output of that debate is that I have been topping up my existing holding in HgCapital, a classic compounder with a long track record in the listed private equity space. This is a fund that has traded at a premium for long periods and, even in recent years, has usually traded at a discount in the mid single digits.

The sell-off creates a buying opportunity, in my view. I view AI as augmentative and enabling, though in the very long term things may, of course, be very different. In the short term, the key question is valuation – values placed on major holdings such as Visma. On a historical basis, HGT’s portfolio has consistently traded on a discount to the IGV Software Index in terms of LTM EV/EBITDA. Crucially, HGT’s portfolio multiple has been relatively stable “through the good times and the bad,” with the large public-market multiple declines in 2022–2023 not mirrored by similarly sharp declines in HGT’s valuation.

On average, the businesses in the portfolio are likely to be valued on a 25.5x multiple, but after the sell-off, that multiple effectively drops to something around 19 to 20 x, with the average portfolio company likely 19% earnings growth. It’s also worth noting that most of HGT’s portfolio sits in the 20–30x multiple range, whereas a significant portion of the publicly quoted IGV index, by weight, still trades above 30x despite the sell-off.

I can, though, see a valuation repricing and think that a 15% discount seems more appropriate given valuation uncertainty. That is still a long way from the current 24% discount, which is about average for its listed PE peers (despite an arguably much more impressive track record). It’s also worth bearing in mind that after previous sales and valuation scares, HgCapital has usually bounced back, moving to either single-digit discounts or even premiums. My guess is that this may happen again, especially given the portfolio’s quality.

Downside protection for equity investors using funds

One of the most commonly asked questions I get from private investors reading my articles is how to effectively use funds and products to protect on the downside, i.e., against market volatility. Three main options suggest themselves. The first is to utilise what are, in effect, structured products bundled as funds. I invest a core portfolio in the Atlantic House Defined Returns fund (accumulation units), which invests in a long series of equity market autocalls that pay a defined return (usually 5-10% per annum) under certain conditions. This kind of fund – along with autocalls – will always lag the wider market but smooth out the return profile. They are not immune to equity market risk but the downside volatility is much more muted. You probably shouldn’t expect much above a long-term return of between 5 and 7% on average over a cycle. As an aside, I personally wouldn’t invest in single-autocall products, nor would I go anywhere near the growing number of barrier ETFs, which allow you to invest in a major index but cap your upside and provide some downside protection. These strike me as overly complicated, and I also feel they take away too much of the upside for most investors

The next alternative is income, especially dividend income via what are called equity income funds. The general idea here is that a steady, progressive dividend, compounded over time, can deliver a steady return on investments in risky assets. Take a few examples. First, there are equity-income or dividend-focused funds (actively managed or passively managed via an ETF). Next up, there are some structures that use what’s called covered call options writing to juice up returns whilst still investing in major equity markets. And lastly, there are real assets, usually held in investment trusts, that produce a steady income stream in the form of dividends.

And last but not least, there are market-neutral funds. Hedge funds are generally not available to most private investors, but there are a few exceptions, such as BH Macro, an investment trust that invests in global macro strategies, as well as the Ruffer Investment Company, which is ostensibly a multi-asset absolute returns fund but is in reality something approaching an open-access hedge fund, considering its complex underlying investment strategies. There are also a few unit trusts worth thinking about, such as the iMGP DBi Managed Futures fund, which invests in managed futures and returned 5.5% in 2025. All of these absolute return strategies have their virtues, but investors need to understand the ever-present risk – you might avoid the massive equity market sell-off, but you could be lumbered with very low absolute returns year in year out. If that happens, you might be thinking, why not invest in cash or fixed income such as gilts?

David Stevenson

Twitter: @advinvestor

This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.