Picking The Right India ETF

October 07, 2016

The new head of India’s Reserve Bank cut the country’s key lending rate this week to the lowest level in five years.

The reason for the “surprising” move, as Forbes put it, was sluggish global growth. But to ETF investors, the cut could very well translate into a wave of new capital flows into India’s market, and the strengthening of its currency.

In other words, it could be good news to Indian equity ETFs.

From the Forbes article, a key takeaway:

“From a big picture view, deflation, disinflation and then low inflation in the developed world is going to be correlated with inflation in the developing world, says Jack McIntyre, portfolio manager of Brandywine Global, a Philadelphia based investment management firm with $70 billion under management. The convergence of global inflation is due to globalized capital flows into higher yielding nations coupled with the fact that companies are still shifting their production to low cost areas, like India. ‘I believe we are going to see more and more of these rate cuts. That should attract additional capital, which could help strengthen the currencies. The flip side is that we have to see what happens with monetary policy in the developed world’ he said.”

So far this year, India-focused equity ETFs have done well, testing a technical bottom twice in February and March, and rallying upward since. The strength is partly related to a generalized improvement in emerging markets. But accommodative monetary policy usually bodes well for stock prices, and India’s new head of the central bank, Urjit Patel, is clearly willing to intervene.

Consider the chart below plotting year-to-date performance of some of the largest India ETFs relative to broad emerging market strategies such as the iShares Core MSCI Emerging Markets ETF (IEMG) and the Vanguard FTSE Emerging Markets ETF (VWO):

 

Chart courtesy of StockCharts.com

 

Investors looking to own Indian equities through an ETF have several options. Below we detail a few.

There are three India total market ETFs that aren’t leveraged or inverse:

INDA is the biggest and most popular India-equities ETF on the market today. The fund covers about 85% of India’s market cap. It tilts away from small-cap securities, which isn’t all that surprising in markets that are harder to access.

INDA’s popularity is tied to the fact that the fund is cheap to own relative to others in this segment; it’s comprehensive in exposure; and it offers good liquidity, trading an average of $65 million in daily volume with a spread of about 0.03%.

The fund has 73 holdings, and allocates most heavily to financials, which represent about 22% of the portfolio. Technology comes second.

 

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