India ETFs Back in Focus as Investors Assess Election Results

Investors have seemed buoyed by the surprising results.

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Reviewed by: etf.com Staff
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Edited by: James Rubin

The results of India’s national election, announced in early June, surprised political observers and investors. 

The incumbent BJP government retained power but with fewer seats in parliament and needed the support of its coalition partners to get the required parliamentary majority (Figure 1). However, as investors have digested the results, they appear to be viewing the outcome as an optimal balance of power, with the Nifty 50 benchmark index up 11% through July 10 since the initial June 4 announcement of the results. 

The return of the incumbent government ensures policy continuity and political stability. Prime Minister Modi returned for a third term, and ministers of key areas like finance and external affairs were retained. 

On the other hand, the BJP fell far short of its publicly stated ambition of getting 400 seats in the 543-seat Lok Sabha, the lower house of parliament. Instead, the party won only 240 seats and now relies on two regional political parties for support. 

The party will also face an emboldened opposition led by the Indian National Congress (INC). This is likely positive news for those investors who may have been concerned about overreach by the current government. Overall, the results seem to be a reaffirmation of India’s large and complex democratic process, which is likely to give investors more confidence in the long term. 

Chart1(Share of Parliamentary Seats in India’s General Elections (2014-2024; Total: 543))

Drivers of Returns

There are currently 17 ETFs listed in the U.S. that provide targeted exposure to Indian companies. These ETFs vary widely in their top holdings, sector exposures, and construction methodologies. To understand and evaluate these ETFs, it is important to first analyze the sector dynamics and drivers of returns in the Indian market. 

There are two dominant long-term drivers of earnings growth for Indian-listed corporations. The first is growth in domestic consumer expenditure. In its India@2047 report, PwC projects that by 2047, India could exceed a per capita income of $26,000, which is more than 10 times its current level of $2,484. 

The World Bank estimates household consumption expenditure accounted for 60% of India’s GDP in 2023. Companies whose earnings are primarily driven by domestic growth include financial services firms like HDFC Bank Limited and ICICI Bank Limited as well as consumer firms like ITC Limited and Tata Consumer Products.  

The second earnings driver is knowledge-based exports. India’s knowledge-based exports are currently dominated by IT services companies like Infosys Limited and Tata Consultancy Services Limited. This sector of the Indian stock market is driven by global corporate spending on technology and analytics rather than domestic demand. India is also looking to expand its knowledge-based export model in manufacturing, in industries like auto-components, specialty chemicals, and health care.   

Figure 2 shows the historical rolling returns for the headline Nifty 50 index and indices for three key sectors–financial services (Nifty Financial Services index), consumer staples (Nifty FMCG index), and software (Nifty IT index). The chart displays annual rolling returns for the past 10 years, the period during which the Modi-led BJP government has been in power. 

(Annual Rolling Returns for Nifty 50 and Select Nifty Sector Indices (July 2014 – July 2024)

The Nifty 50 index had an average annual rolling return (calculated with a monthly moving window) of 14.1% for the July 1, 2014–July 1, 2024 period. As shown in the chart, the different sectors diverged during specific periods. The Indian tech sector underperformed in periods when the IT sector globally was under pressure, like in 2022, and has only a 0.28 return correlation to the consumer staples sector (Nifty FMCG index). By contrast, there is a 0.61 correlation between the financials and consumer staples index returns, both of which are more dependent on domestic growth. 

Key India-Focused ETFs

The 17 India-focused ETFs listed in the U.S. had just under $20 billion in aggregate assets as of July 10, 2024. They have taken $4.9 billion in net inflows year to date through July 10. Table 1 lists the six largest India-focused ETFs listed in the U.S. 

chart3(A Comparison of Largest India-Focused ETFs Listed in the U.S. )

These different ETFs offer investors a variety of options in terms of sector and market cap tilts.  

  • The iShares MSCI India ETF (INDA) tracks an MSCI index designed for investors wanting indexed exposure to large and mid-cap names. Another similar ETF is the iShares India 50 ETF (INDY), which tracks the headline Nifty 50 index. INDA has 151 holdings in both the large and mid-cap segments, while INDY holds 50 large cap stocks. As of July 10, 2024, INDA had a slightly higher exposure to consumer staples and discretionary sectors (20.5% vs 17.5% for INDY) and lower exposure to IT (10.8% vs. 12.8% for INDY).  
  • Some investors may want to focus on sector ETFs to implement a directional view of a specific industry. For example, the Columbia India Consumer ETF (INCO) holds 30 stocks focused solely on the Indian consumer market and has returned 21.6% this year through July 10, 2024. It has a 14.4% average annual rolling return over the last 10 years (July 2014–July 2024) vs. 10.5% for INDY. Other sector focused ETFs include the Nifty India Financials ETF(INDF) and VanEck Digital India ETF (DGIN).  
  • Investors looking to tilt away from the market cap weighted large cap ETFs could consider the iShares MSCI India Small-Cap ETF (SMIN). Unlike in the U.S., small cap ETFs have outperformed large caps in India. Over the last 10 years (July 2014–July 2024), the average annual rolling return for SMIN is 17.8% vs. 10.5% for INDY, which tracks the Nifty 50 index. This is true as well in 2024, where SMIN is up 20% year to date through July 10, 2024, against 10.7% for INDY. SMIN provides exposure to mid and smaller cap industrial stocks like Voltas and KEI Industries. Another option would be to use equal weighting to tilt away from the largest firms. The equal weighted First Trust India NIFTY 50 Equal Weight ETF (NFTY) tilts more towards the healthcare and materials sector and away from the financial sector, relative to INDY. 

Finally, U.S. investors will also need to consider currency movements since the NAVs of these funds are denominated in dollars, and therefore, any depreciation in the Indian rupee dilutes returns in dollar terms. As of July 10, 2024, the Indian rupee had depreciated by 18% against the U.S. dollar in the trailing five years. When the dollar appreciates relative to the Indian rupee, ETFs like the WisdomTree India Hedged Equity Fund (INDH) will have a higher return than a corresponding unhedged ETF. 

Aniket Ullal heads CFRA’s ETF data and analytics business. He has worked in the ETF industry since early in its development. Ullal founded First Bridge, one of the industry’s leading ETF data sets that was acquired by CFRA in 2019. Previously, he was the product head for U.S. index products at S&P Dow Jones Indices.