Don't Overlook India ETFs

Though broadly diversified emerging market ETFs get the lion’s share of the assets, investors also have options that are focused on one country—or even a specific sector in a country—if they’d like to take a tactical tilt in an effort to generate alpha.

India is a potential opportunity in this regard for investors who want to drill down further as the country could see brighter days ahead.   

It also could be just the solution investors need to respond to China’s outsized weighting in the most prominent cap-weighted emerging market indexes (read: China’s Heavy Hand In Emerging Market ETFs).

While India was ravaged in the spring by a second wave of COVID-19, India equities have roared back over the last few months. Over the trailing year, the iShares MSCI India ETF (INDA) has outperformed both the iShares MSCI EAFE ETF (EFA) and the iShares Core MSCI Emerging Markets ETF (IEMG).

Courtesy of StockCharts.com

More Than Market-Cap Weighted

INDA tracks a market-cap-weighted index of the top 85% of firms in India’s securities market. However, other ETFs provide a different way of looking at India equities.

One such option is the Nifty India Financials ETF (INDF). This fund tracks an index of India’s top 20 financial services companies. This is a sector of the market that could be well-positioned for growth going forward.

Unlike Chinese internet stocks that have been hit hard by the government crackdown, government action in India has been beneficial for the banking sector in particular.

Due to the pandemic, the government instituted a moratorium allowing borrowers to defer payments until economic conditions normalized. This has enabled banks to continue lending without the risk of losses.

In addition, the government also provided a credit guarantee that enables banks to lend to small and midsize businesses at attractive yields. As a result, private sector banks in the country have reported double-digit loan growth over the past year.

Aside from loans, much of the population does not yet have access to banking products such as mortgages, credit cards or life insurance. This means that as the economy matures and GDP per capita increases, there is significant room for growth as more citizens begin to make use of these products.

While the sector has a positive outlook, because INDF has just $7 million means that this ETF—while not significantly pricier in terms of expense ratio—has a much higher spread relative to INDA.

An interesting point about INDF is that due to the strong governance requirements for India’s financial sector, the fund has an MSCI ESG Rating of AA. It is the only India-focused fund to garner a rating above BBB.

Earnings-Weighted ETF Has Worked

Another ETF that takes a unique angle on India is the WisdomTree India Earnings Fund (EPI). This fund tracks a total market index of India companies, but rather than weighting by market cap, companies are weighted by earnings in the prior fiscal year.

This change in weighting methodology leads to some differences in sector composition between INDA and EPI, which can be seen by using our ETF Comparison Tool.

While both funds have similar allocations to financials and technology, EPI tilts slightly more toward basic materials and industrials, sectors that could benefit from strong economic growth.

The rationale for weighting by earnings is that it is a way to tilt toward companies that have strong fundamentals while also keeping valuations lower. Since the fund is rebalanced annually, the portfolio is readjusted regularly to tilt toward those companies that have exhibited stronger earnings in the prior year.

This approach has worked for EPI when compared to the market-cap-weighted INDA. EPI is outperforming INDA by 18.8% over the trailing year.

Courtesy of StockCharts.com

Keep Risk Management In Mind

When considering these ETFs for your portfolio, it is important to remember that, regardless of weighting methodology, these funds are exposed to unsystematic risk by being invested in only one country. And a fund like INDF, with exposure to only one sector and 20 holdings, has not only country risk but sector risk.

These ETFs should be viewed as tactical tools to be used as a portion of the allocation, rather than as funds that could comprise the entire emerging market allocation of a portfolio.

Contact Jessica Ferringer at [email protected] or follow her on Twitter