India Through ETFs

By Matthew McCall | April 26, 2012 AAA

Investing in the fastest growing large economies in the world over the next two decades sounds like a sound investment idea. So why have investors begun to shun India in favor of other Asian emerging countries?

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According to The Economist, real gross domestic product (GDP) growth is expected to average 5.2% a year from 2011 to 2030. The booming information technology industry and changes in the old school agriculture sector will be needed to keep the lofty goals.

India ETFs
The several exchange-traded funds (ETFs) that offer exposure to India have done well year-to-date. However, in the last few weeks they have been losing steam at a rapid pace. The iShares S&P India Nifty 50 ETF (Nasdaq:INDY) remains higher by roughly 14% in 2012, but is down over 11% from its February high. This is causing major concerns for investors that own India-related ETFs.

INDY is a basket of 51 stocks that is composed of the largest and most liquid stocks in the Indian equity market. The ETF tracks a rupee-denominated index, which would be beneficial if the Indian currency rises versus the United States dollar. The ETF is heavily weighted in the banks (19%), software (13%), cigarettes (8%) and refineries (8%). The 0.89% expense ratio is a little high for a large cap single country ETF. Overall, INDY would be for the investor that wants exposure to the large cap stocks based in India.

The WisdomTree India Earnings ETF (ARCA:EPI) is up around 17% year-to-date and tracks an index that weighs its holdings by their net income of the last fiscal year. The companies included must be profitable to be considered for the portfolio. The 271 stocks that make up the portfolio are concentrated in banks (20%), energy (18%), materials (12%) and software & services (12%). The expense ratio is 0.83% with a yield of about 0.78%.

SEE: How To Pick The Best ETF

Niche India ETFs
There is a trio of ETFs offered by the EGShares family of ETFs that concentrate on niche areas within the Indian market. The EGShares India Consumer ETF (ARCA:INCO) is composed of 30 stocks that are in the consumer sector of India. Specific sectors include personal goods, food producers and media. The ETF charges an expense ratio of 0.89% and the holdings have a median market capitalization of nearly $2.8 billion. Year-to-date, the ETF is up around 17%.

Up more than 19% in 2012 is the EGShares India Infrastructure ETF (ARCA:INXX). The ETF is designed to take advantage of the estimated $1 trillion expected to be spent on infrastructure in the country in the coming five years. The 30 stocks are mainly industrials (38%), utilities (25%) and telecom (12%). The expense ratio is 0.85%.

Investors seeking exposure to the small cap class could consider the EGShares India Small Cap ETF (ARCA:SCIN). The ETF is the top performer, with a gain of roughly 23% year-to-date. The 76 stocks are in the financial (25%), industrial (20%) and consumer goods (17%) as well as other sectors. The expense ratio is 0.85%.

SEE: Advantages And Disadvantages Of ETFs

The Bottom Line
The key to investing in India will be patience as the country goes through some difficult times in the near future. Long-term, the numbers suggest steady growth that is well above its peers. Investors should use the weakness in share prices to begin building long-term positions. If you are not able to weather the ups and downs of a single country ETF, India is not an option at this time.

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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