Van Eck Launches Small-Cap India Fund

Van Eck goes head-to-head with Emerging Global Advisors with its new small-cap
India fund. Is there room for both?

Van Eck Global, the New York-based ETF and mutual fund firm that specializes in natural resources and niche global markets, today launched an India-focused small-cap ETF.

The Van Eck Market Vectors India Small Cap Index ETF (NYSEArca: SCIF) tracks the Market Vectors India Small-Cap Index, which consists of 122 companies with an average market capitalization of $456 million. The new fund carries an expense ratio of 85 basis points.

Although Van Eck has pioneered global markets such as Africa and the Middle East,
India, with its booming economy and huge potential consumer base, is already covered by ETFs from some of the industry’s largest fund sponsors. The PowerShares India Portfolio (NYSEArca: PIN), for instance, has $425.8 million under management, while WisdomTree’s India Earnings ETF (NYSEArca: EPI) has accumulated $1.1 billion in assets. Both funds launched in 2008.

But while PIN and EPI tend to focus on the large-cap end of the Indian market, Van Eck will compete directly against the Emerging Global Shares India Small Cap ETF (NYSEArca: SCIN), which launched earlier this year. Like Van Eck’s new offering, SCIN tracks a market cap-weighted index of small-cap firms and carries an expense ratio of 0.85 percent.

Van Eck Vs. Emerging Global

The two funds differ in the scope of their indexes—Emerging Global’s SCIN tracks approximately 75 companies compared with Van Eck’s 122. They also differ by sector weightings.

Van Eck aims to underweight the brutally competitive Indian telecom sector as well as the utilities sector, which is heavily regulated by the Indian government. Currently, the top sectors in the Van Eck Market Vectors
India Small Cap Index are industrials, with 26.8 percent of assets; financials at 20.4 percent; and materials, with 13.7 percent.

By contrast, Emerging Global’s Indxx India Small Cap Index, which is provided by the Delhi, India-based financial services firm Indxx, weights commercial banks most heavily (12.59 percent of net assets), followed by IT services (8.67 percent), and software (7.78 percent).

In addition, Van Eck believes its fund hews more closely than its competitor to its promise of Indian small-cap coverage. “The average market cap of our fund is lower and therefore it participates more in the small-cap sector of
India,” said Harvey Hirsch, a senior vice president at Van Eck Global, during a telephone interview today.

Richard Kang, the chief investment officer and director of research at Emerging Global Advisors, acknowledged that while SCIN’s average market cap is higher, at $632 million, there is room for both funds.

“I welcome it,” Kang said of Van Eck’s new offering. “It means more people to tell the story of
India.”

Tracking Error And The Shadow Of INP

Like many emerging economies,
India places certain restrictions on foreign ownership of stock, a fact that led to wild premiums and discounts in the iPath MSCI India ETN (NYSEArca: INP) in 2007. At one point, the note was trading at a 22 percent premium to its underlying value, and Barclays suspended the issuance of new shares for several weeks during the fourth quarter of that year.

While acknowledging that
India’s foreign ownership restrictions can create problems for exchange-traded products, Adam Phillips, Van Eck’s director of ETF sales, said his firm had taken steps to minimize their effect on SCIF. “Foreign ownership restrictions are prevalent, but the index itself does its best to screen out those stocks.”