Time To Get Into India ETF

The indian economy lost momentum in 2013 and 2014 with growth dropping to low single digits. Due to the ineptitude, weak governance and management of government led by the Congress party even India’s presence along with other countries in BRIC has been questioned . However since the election in late 2014 investors saw an opportunity to restart the growth engine, especially the new government will be led by Narendra Modi who as Chief Minister of Gujarat who was instrumental in pushing pro growth policies.

Bharatiya Janata Party (BJP) claim to victory from the recent election has been a historical where it became the first party since 1984 to win outright majority in parliament. With change of power in the worlds largest democracy after an election process that took a month for all the votes to be casted. The implications for investors could be huge. Rightly so, Investors are asking what does this mean for the economy and the Indian stock market.

What has caused the rise in the Indian stock market?

The strong performance of the Indian stock market can be related directly to the expectation that the previous government in India was going to lose and replaced by the newly elected BJP. Even after months of record gains in anticipation of the new government. Indian stock market in anticipation of BJP victory closed by more than 5% in USD terms. For US investors the easiest and cheapest means of gaining exposure to the Indian companies and stock market is through the India ETFs.

There are two ways for investors looking to gain exposure to the India market using ETFs. Either investing ETF that tracks the countries companies directly (similar to France ETF) or wider regional ETF such as BRIC ETF or ETF that invest in Asia economies. The list below highlights the 4 largest India ETF which invests directly in India stocks. Read on for our take and highlights of the most important differences between the various India ETFs.

India ETF list

Ticker ETF
EPI WisdomTree India Earnings Fund
INDA iShares MSCI India ETF
INDY iShares S&P India Nifty 50 Index Fund
PIN PowerShares India Portfolio
INDL Daily India Bull 3x

 

India Exchange Traded Funds Analysis

WisdomTree India Earnings Fund (EPI) is the largest India ETF listed in the US. It is a fundamentally weighted index which means the holdings of the underlying fund is weighted according to valuation fundamentals instead of simply company market capitalization.

Investors should be comforted to know most of the Indian companies in the EPI are mid (28%) and large cap (61%). The emphasis on well known Indian companies is reflected in EPI top 10 holdings with the largest position being Reliance Industries which comprise almost 10% of the AUM followed by Infosys, Oil & Natural Gas Corp.

Other large Indian companies in the India ETF includes Tata Motors, State Bank of India and Tata Consultancy. Top 10 holdings account for low 40% of the ETF AUM compared to the other India ETFs nearly almost 50% of the ETF. With more than 180 overall holdings the ETF provides some level diversification. Sector breakdown analysis of the ETF shows EPI places largest emphasis on Financials (27%), Energy (20%) and Information Technology (12%).

Risks investing in WisdomTree India Earnings Fund (EPI)

Investing in emerging market can be volatile and typical India ETF like EPI is no exception. Since inception in 2007 it has seen annual volatility of around 36% relative to S&P 500 which has average volatility of low 20s and sub 20 after the financial crises.

Comparing EPI to other emerging markets it also maintains a relative higher Beta of 1.18 (using MSCI EM Index as the benchmark). This means that EPI is 20% more sensitive to day to day changes to other markets that are considered emerging markets (for those that consider the above risks too high for their portfolios. Investing in emerging market bond ETF could be an alternative in raising portfolio return without the equity risk).

One advantage of EPI is the benefit of portfolio diversification from S&P 500. Overtime EPI correlation with the main US market index is only 0.67. Hence only ⅔ of the time EPI tracks the S&P 500 daily movements. A portion of the portfolio allocated to EPI can provide a diversification benefit for the investor.

India ETFs

iShares have 2 ETF products that tracks the Indian market. Each ETF provides a specific exposure to the Indian market for investors.

The return of iShares MSCI India ETF (INDA) over the last year has approximately tracked other India ETFs. INDA approach investing in India companies differently using market capitalization as primary condition of position weighting in the fund. The names of the top 10 holdings of INDA are very much the same as those in EPI. The main difference being the weight of the individual positions.

As the result. from comparing valuation metrics of INDA to EPI, the overall P/E and P/E is considerably higher than EPI (P/E for INDA is in mid 20s vs teens for EPI).

Concentration risk is also higher with total weight of top 10 holding adds up to around 50% of AUM. Financials and Information Technology stocks accounts for 45% of the ETF.

From the risk perspective, the standard deviation is much lower than EPI at mid 20’s since inception. INDY is still much more sensitive to the major US markets with a relative beta of 1.37.

iShares MSCI India ETF (INDA) focus on the Nifty index which comprise of the 50 largest companies listed in India. While only 50 companies are included in the ETF. The risk of concentration is balanced by focusing on the largest and most well known Indian companies across 22 sectors of the Indian economy.

The last major India ETF is the Powershares India Portfolio (PIN) which similarly to INDA also just include 50 stocks in the ETF. However unlike INDA which tracks the Nifty index, the largest Indian market Index. PIN tracks the India Index which is a select group of 50 stocks from the largest companies in listed in India. Although the ETF only have $400 million AUM this fact should not put investors off. The average market capitalization of the stocks in the ETF is around $25 billion.

The standout feature of PIN is the difference focus on the companies included in the ETF. The above 3 major India ETF weighs heavily towards financials. PIN places a larger emphasis on energy (26%) and materials (11%). Only 1 financial company (Housing Development Finance Corp) is included in the top 10 position of the ETF.

Out of all 4 India ETF, PIN sticks to the middle of the pack with standard deviation of just below 30 and mid teens P/E at a level just above EPI.

 

3x Leveraged India ETF

Direxion Daily India Bull 3x (INDL) is a leveraged exchange traded fund which provides 3x the daily return of the India Nifty Index.

Due the leverage nature of the fund, it has a high gross expense ratio at around 1.30%.

Investors should also note that while most ETF offer redemption in kind for major investors. PIN only offer a combination of partial redemption in kind and cash. Given the ETF traded at a premium to NAV. Direct redemption of ETF units could result in lower than expected between NAV and market price. This does not affect investors that buy and sell the ETF on the market directly.

The overview of India ETFs above presents a clear and distinctive picture for investors looking to invest in India stocks. Using ETF rather than direct investing bypasses a lot of the issues like exchange risk, opening foreign accounts or even investing in ADRs.

Exchange Traded Funds offers a simple and effective solution in gaining particular exposure. With the investment vehicle nailed down, the only step which would be considered the major step is choosing the right ETF. The above information provides a good starting point.