India ETFs: Back on Track? - ETF News And Commentary

Indian economy appears to have turned the corner. Recent HSBC survey--which maps manufacturing and services sectors—showed that India expanded at a faster rate than China during the month of February.  (Read: 3 Red Hot Dividend ETFs)

Further, trade data for the month of February showed that the exports rose for the second month in a row, pushing the trade deficit to its lowest level in 10 months. Better trade data resulting from pickup in exports to Europe, is likely to result in an improvement in current account deficit this year.

The budget presented by the Indian government recently had many investor and business friendly measures—which could put the economy back on the higher growth path, even though the budget did not do much to alleviate concerns regarding widening fiscal and current account deficits.

As the inflation seems to be coming under control, there are hopes for another rate cut by the central bank (after a cut in January this year), which would further support growth.

According the government, the economy will grow between 6.1% and 6.7% in the fiscal year starting April 1, after an estimated 5.5% growth for the current year—its slowest growth rate in a decade. A recent report by the Moody’s projects the economy to grow at ~7% from 2014 onwards.

As a result of the recent optimism, the stock market is at its highest level in about two years and the currency has been strengthening. (Read: Buy these ETFs for higher returns and lower risk)

Earlier last year, S&P and Fitch had downgraded the outlook on the country and warned of a sovereign credit downgrade. If downgraded, India would be the first country in the BRICs block to lose its investment grade rating.

It appears that the downgrade threats were a wake-up call for the Indian policy makers. Later last year, the government announced many significant reforms. While the reforms were a welcome change after many years of policy paralysis in the country since they indicated the government’s willingness to take political risks even in the face of looming elections, it is important that the reforms are implemented at the earliest.

Further, even with the recent optimism, it is quite unlikely that the economic growth will revert to 8-9% growth recorded during 2004-2011 anytime soon. India suffers from some structural problems like high fiscal deficit, massive corruption, chronic inflation and very bad infrastructure.

Indian stock market exhibits high volatility since its performance is largely driven by foreign institutional inflows. The currency also remains vulnerable to major capital flows, even though the country has foreign exchange reserves of approximately $300 billion, as the currency market is much less liquid than major currency markets. (Read: 3 Excellent ETFs for Income Investors)

At the same time, despite several constraints, the growth in India is still one of the highest in the world. Positive factors like a rising middle class and a younger population with growing spending power which results in soaring domestic consumption will continue to fuel growth.

For investors seeking broad exposure to Indian equities, following ETF choices are available:

Wisdom Tree India Earning Fund (EPI)

EPI is the most popular ETF in this space, with about $1.1 billion in AUM. It tracks the Wisdom Tree India Earning Index, which weights the Indian companies based on their earnings. It charges the investors 83 basis points for annual expenses.

In terms of sector weightings, the fund has highest exposure to financials (26%), followed by energy (21%), information technology (14%) and materials (10%).Top 10 holdings account for more than 40% of total holdings. EPI is currently Zacks #1 Rank (Strong Buy) ETF.

PowerShares India Portfolio (PIN)

PIN which tracks the Indus India Index, has assigned highest weighting to the Energy sector (26%), followed by information technology (19%) and financials (18%).

The expense ratio of the ETF is 81 basis points. Top ten holdings constitute 58% of the holdings. PIN is currently Zacks #2 Rank (Strong Buy) ETF.

S&P India Nifty 50 Index Fund (INDY)

INDY follows S&P CNX Nifty Index, a free float market cap weighted index of 50 largest and most liquid Indian companies. It charges the investors 92 basis points for annual expenses.

Top 10 companies in the fund account for 59% of the fund. Sector weighting are: financials (28%), Information Technology (14%) and power (13%). INDY is currently Zacks #1 Rank (Strong Buy) ETF.

iShares MSCI India Index Fund (INDA)

This is the newest ETF in the space, launched in February last year. The fund follows MSCI India Index, which is float adjusted market cap weighted index. With the expense ratio at 0.67%, this is the cheapest option now.

Financials enjoy highest weighting (31%), followed by information technology (17%) and energy (12%). Top ten companies account for more than half of the total holdings. INDA is currently Zacks #2 Rank (Strong Buy) ETF.

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WISDMTR-IN EARN (EPI): ETF Research Reports

ISHARS-M INDIA (INDA): ETF Research Reports

ISHARS-SP INDIA (INDY): ETF Research Reports

PWRSH-INDIA POR (PIN): ETF Research Reports

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