Picking The Right India ETF

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:

• iShares MSCI India ETF (INDA): $4.1 billion in assets and a 0.68% expense ratio

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.

• WisdomTree India Earnings Fund (EPI): $1.4 billion in assets and a 0.84% expense ratio

EPI is a total market ETF, but one that offers a slightly alternative take on the space by selecting and weighting its portfolio of India equities based on earnings. EPI essentially offers access to the companies that have had strong earnings in the most recent fiscal year.

The result is a strategy that tends to tilt toward value names and often allocates most heavily to higher beta sectors, according to ETF.com Analytics.

The overall portfolio is a lot broader than INDA, with some 243 holdings, and an average daily volume of more than $74 million. But EPI trades with a marginally higher average spread of 0.05%, putting its total cost of ownership around $89 per $10,000 invested. That’s roughly 25% more than INDA’s all-in price tag.

• EGShares India Infrastructure ETF (INXX): $46 million in assets and an 0.88% expense ratio.

INXX is an infrastructure fund. It owns exclusively infrastructure-related companies. In that sense, INXX is not a total market fund in the way INDA and EPI are, but it gets classified as one by our data provider FactSet, because the infrastructure theme cuts across various sectors. INXX tilts toward sectors linked to infrastructure such as industrials, materials and utilities, but it also allocates heavily to consumer discretionary, for instance.

INXX only holds 30 securities, and trades with a pretty wide average spread of 0.47%. That brings the total cost of ownership of this fund to $135 per $10,000 invested—a pretty high price tag for this segment. But competing on cost isn’t INXX’s main goal. “It's for investors with a strong conviction regarding the growth potential of Indian infrastructure,” according to ETF.com Analytics.

There’s one India total market ETN:

• iPath MSCI India Index ETN (INP): $219 million in assets and an 0.89% expense ratio.

INP also competes in the total market segment, but with a crucial difference: It’s not an exchange-traded fund, but an exchange-traded note. That means the strategy is backed by the credit of its issuing bank; in this case, Barclays.

INP also tracks the same benchmark underlying the largest India ETF, INDA—the MSCI India Total Return Index, which offers exposure to 85% of India’s market cap. Once upon a time, INP was the first exchange-traded product to focus exclusively on Indian equities. It launched in 2006.

But today the strategy competes with more liquid, cheaper-to-own and in one case, identical-in-exposure ETFs, making it a choice in this segment that’s more difficult to support, according to ETF.com Analytics.

INP has “adequate liquidity,” but trades with a wide average spread of 0.52%, which bumps the cost of owning and trading this strategy to $141 per $10,000 invested—the highest price tag among these India funds. It’s also closed for creations at the moment, according to FactSet.

 There are also two large-cap India ETFs:

• iShares India 50 ETF (INDY): $770 million in assets and a 0.94% expense ratio
• PowerShares India Portfolio (PIN): $429 million in assets and an 0.82% expense ratio

Both funds invest in India’s 50 largest and most liquid firms, but they track slightly different benchmarks, resulting in sector tilt differences. For instance, INDY is heavily allocated to financials, at about 31% of the portfolio, followed by technology at 14%. These two sectors represent about half of the overall mix. PIN, meanwhile, tilts more toward energy, at 23%, and financials, at 20%.

For a complete list of the 13 ETFs offering access to India’s equity market, check out ETF.com’s India Channel.

Contact Cinthia Murphy at [email protected]