ETF Opens India Financials Door

Everyone is eyeing whether the economies-reopening trade will shine a brighter opportunity for emerging markets this year. The conversation tends to focus on broader market exposures, or on China. But Amit Anand, co-founder of NextFins, says the biggest growth opportunity is India. NextFins is a new-to-ETFs issuer that brought to market last October a first-of-its-kind ETF to focus exclusively on India’s financials sector, the Nifty India Financials ETF (INDF).

INDF is a portfolio of about 20 financial stocks, and costs 0.75% in expense ratio. Here, Anand shares the big investment picture for India equities, the case for financials, and how a career in hedge funds led him and his team to ETFs.

ETF.com: When we talk about opportunity in emerging markets, we often focus on broad market exposure, or we fall into a conversation about China. You focus on India. What’s often overlooked about the opportunity there, and what’s most compelling?
Amit Anand: What’s really compelling about India is that, over the next decade, it’s forecasted to be the fastest-growing major emerging market. Forecasters expect average GDP growth of about 7% a year. Specifically, in 2021, it's forecasted to be the fastest-growing major market, with an expected GDP growth rate of about 11%.

By 2030, which is just the end of this decade, India is expected to become the third largest global economy in the world. So, relative to any other global market, including all of the emerging markets, India is expected to have the fastest growth trajectory, which makes it a very exciting place to invest.

Clearly, we think investors should have their own exposure to India. If you look at ETFs today, there are 1,518 U.S.-focused ETFs. There are 52 China-focused ETFs. But before we launched INDF, there were only 11 India-focused ETFs. Considering this is going to be the fastest-growing economy in the world and third largest economy in the world, we thought investors lacked access.

ETF.com: The pandemic derailed just about every country's growth trajectory, and these are some aggressive GDP projections. What’s the main driver of this expected growth?
Anand: Long-term demographics are very attractive for India. That’s the reason forecasters expect it to be the fastest-growing major economy for the next decade.

Specifically, India is the only economy that's going to be adding to its workforce over the next decade. That's a really important point, because even with what we consider to be other emerging markets, they’re going to have more people retiring than entering the workforce. There's a case to be made for very long-term, durable growth.

Near term, India got hit pretty badly with COVID. The government in India took a very conservative stance relative to lockdowns, and India ultimately suffered a harsh lockdown. That means India's very exposed to the reopening trade.

Goldman Sachs recently had a report that showed that India’s equity market has the highest correlation with vaccine optimism. Ironically, the Chinese equity markets have the highest negative correlation to vaccine optimism, and that's because China went into COVID and came out of COVID before any other major economy. Among major equity markets, whether a vaccine is successful or not, it matters the most to India equities.

ETF.com: You launched INDF. Why do you believe a focus on the financial sector is the best way to capture this growth?
Anand: The most interesting facet in investing in any emerging market is corporate governance. Many emerging markets offer growth, but it's really important to focus on sectors that have a good track record of corporate governance. In India, the financial sector tends to have the best corporate governance. The reason for that is that financial companies are very heavily regulated by India's central bank, and the central bank historically has not allowed large industrialized families in India to control banks; banks have to be controlled by professional managers and shareholder-owned corporations.

That causes corporate governance to be generally better, which has produced market-beating returns. We focused on an India financial ETF because, over the last five, 10, 15 years, the Indian financial sector has beaten the benchmark index.

If you look at how most people invest in India today, with U.S.-based ETFs, they use the iShares MSCI India ETF (INDA). And when we compared our index to the iShares index, over the last 15 years, the financials index is up 11x, where the iShares index is up 5x.

It's not just about growth, because many types of companies grow—consumer companies grow, pharmaceutical companies grow. It's specifically because the financial sector provided investors with growth plus governance, which is hard to find in emerging markets.

ETF.com: When you compare INDF to INDA, there are only five companies (out of 20 total) that are exclusively in INDF. Is it tough to pitch the case for a narrower focus when you're getting almost all the same names in INDA, which has $5 billion in assets, a slightly lower fee and a well-established track record? (You can compare two ETFs using our ETF.com Comparison Tool.)
Anand: Actually, a lot of people who have historically had investments in India—large allocators, like sovereign wealth funds and large pension funds—have specifically invested in India financials. It’s where the smart money already is. It's been an open secret that if you’re going to invest in India, then invest in the financials, because of good governance.

The second thing I’ll mention is that the iShares index has left out what’s been the crown jewel of the India stock market. It's a company called HDFC Bank. It’s one of the three or four largest market-cap companies in India. And it’s been one of the best performers over a medium- and a long-term perspective. Because INDA leaves out HDFC Bank, investors aren’t fully benefiting from the growth of India’s economy. HDFC Bank is our largest holding.

ETF.com: INDF already has sector concentration, but it’s also concentrated with only 20 holdings, and HDFC Bank, alone, snags more than 18% of the mix. You use a 25/50 weighting cap to address that, right? Is this type of concentration a tough sell for many advisors who prefer to keep emerging market exposure broad, less risky?
Anand: We worked with NIFTY, which is the leading index provider in India, to take one of their indices that had been listed for many years and make it U.S.-ETF-friendly. To that end, we instituted the caps, which are: the largest holding cannot be over 25%, and the top five holdings can't be over 50% of the index.

I’ll also say that investors are increasingly moving towards thematic ETFs versus broad ETFs for exposure. They’ve taken to the idea that thematic ETFs can provide them both exposure and alpha, and that’s helped with our conversations. INDF has a track record of financials having provided 700 basis points of alpha a year versus the benchmark over 15 years. We're offering a slice of the market that just happens to be the slice that’s historically generated most of the alpha in that stock market.

While some investors will only be interested in the benchmark, I think that because of the growth in thematic investing, more and more investors are likely to look towards alpha-creating opportunities.

ETF.com: The elephant in the emerging market room is China. How do you get past that, and bring retail investor attention to the opportunity in India?
Anand: China will always deserve a place in people's portfolios, because it is, going forward, going to be either the largest or second largest economy in the world.

But when we think about whether people already have a way to invest in China, the answer is yes. There are already 64 ETFs listed in the U.S. that invest in China. For such a large market, India has only 11 ETFs, so the value proposition is different. INDF is the first pure-play India financial ETF, so it’s about increasing market access for investors.

ETF.com: You come from the hedge fund world. How has that colored your approach and your thinking about ETFs?
Anand: Although we’re a new ETF issuer, we're veterans of professional investing. I co-founded a hedge fund called Adi Capital Management about six years ago. Prior to that, I used to work at a hedge fund that was seeded by Tiger Management. My partner used to work directly for Julian Robertson at Tiger Management. And we have a board advisor who is a former CEO of the Toronto Stock Exchange.

We launched NextFins because we want to bring ETFs to market that have very long track records of superior investment performance. I think what's really going to work for long-term allocators is going to be ideas that have generated alpha for five, 10, 15 years—those with long track records.

Our entire reason for existing is, based on our hedge fund careers, that we see about five themes that smart money has used over the last decade to create superior returns. India financials is one of them. There's at least four other themes that are where hedge fund allocators are invested. So, we thought, “Why shouldn’t these themes be available to everyone through the ETF format?”

INDF is our first product, but we're going to follow it up with about four other themes that have long track records of investment outperformance.

ETF.com: And these themes are … ?
Anand: I can't share them with you because those are highly proprietary in terms of what we're going to bring to the market.

Contact Cinthia Murphy at [email protected]