Indian ETFs Surge After Abolition of Tax Surcharge

Government scraps surcharge on foreign investment, speeds up bank stimulus

India’s closely watched stock proxy, the Nifty 50 Index, has returned a disappointing 1.8% this year, underperforming the iShares MSCI Emerging Markets ETF (EEM) and SPDR S&P 500 ETF (SPY). In the past three months alone, the index has shed 7.10%.

As well as facing pressure from the escalating trade spat between the United States and China, Indian stocks have sold off aggressively after the government increased its tax surcharge on foreign portfolio investors (FPIs) in the Union Budget on July 5. According to the Economic Times, overseas sellers have withdrawn 225 billion Indian rupees ($3.1 billion) from the local market since budget day.

In a move that caught market watchers somewhat by surprise after the Indian market close Friday, Finance Minister Nirmala Sitharaman announced the removal of the tax surcharge on FPIs as well as domestic investors and accelerating a $10 billion capital injection into state-run banks to lift consumer sentiment and offset slowing economic growth. "Friday's announcement is a turning point for the domestic market. It could have been better if the global factors were also accommodating," Sunil Sharma, chief investment officer at Sanctum Wealth Management in Mumbai told Reuters.

Traders can gain access to Indian stocks using the three exchange-traded funds (ETFs) outlined below. From a technical standpoint, each fund rallied from crucial support Friday and completed a rare but reliable reversal three-bar candlestick chart pattern known as a bullish abandoned baby that signals a new uptrend. Let’s review the specifics of each ETF and work through several trading scenarios.

iShares MSCI India ETF (INDA)

Formed in 2012, the iShares MSCI India ETF (INDA) seeks to provide similar returns to the MSCI India Index – a benchmark comprising of the top 85% of companies in the Indian securities market. The fund topweights financials, allocating roughly 25% of its portfolio to the monetary- and fiscal policy-sensitive sector. Top individual stock weightings include Reliance Industries Limited (RELIANCE.NS) at 11.30%, Housing Development Finance Corporation Limited (HDFC.NS) at 10.54% and Infosys Limited (INFY) at 8.71%. The ETF charges a middling 0.64% management fee, while a 0.03% average spread and daily turnover of more than 3.3 million shares provide ample liquidity. INDA controls nets assets of $5.11 billion, offers a 1.75% dividend yield and has returned -3.49% YTD as of Aug. 26, 2019. The fund has dropped over 7% in the last month alone.

INDA shares have oscillated within a four-point descending channel since mid-May, establishing clear support and resistance areas. The fund's price surged over 2% from the channel pattern's lower trendline on above-average volume Friday that may act as a catalyst for further buying in subsequent trading sessions. Those who take a position should look for a move to the channel’s top trendline at the $35 level. Implement risk management by placing a stop-loss order beneath this month’s low at $30.93 and amending it to breakeven point if price rises above the 200-day simple moving average (SMA).

Chart depicting the share price of INDA.

Direxion Daily MSCI India Bull 3x Shares (INDL)

With assets under management (AUM) of $66.93 million, The Direxion Daily MSCI India Bull 3x Shares (INDL) also tracks the MSCI India Index but aims to deliver three times its daily performance. For example, if the fund's benchmark trades up 1%, this ETF strives to return 3%. The fund’s leveraged exposure coupled with a daily dollar volume of $2.7 million, makes it a suitable instrument for traders who what an aggressive bullish bet on Indian stocks. Traders should consider using limit orders rather than market orders to combat the ETF’s slightly wider 0.18% average spread. While INDA's expense ratio of 1.38% isn't cheap, it remains completive for a geared fund that uses derivate products. Returns over more extended periods may deviate from the specified leverage due to the effect of compounding. As of Aug. 26, 2019, the fund yields 0.90% and has fallen over 20% in the past month.

The INDL share price remained entrenched in a trading range for the first two months of the year before trending 24% higher in March. Over the last four months, the ETF’s price has fluctuated within a descending channel. The recent retracement to the pattern’s lower trendline provides an excellent risk/reward swing trading opportunity. Those who buy here should set a take-profit order near the channel's upper trendline while limiting downside with a stop positioned underneath Aug.22 low at $49.35. The trade offers a risk/reward ratio of 1:5.6 ($19.20 profit per share / $3.45 risk per share), assuming a fill at Friday’s $52.80 closing price.

Chart depicting the share price of INDL.

WisdomTree India Earnings Fund (EPI)

The WisdomTree India Earnings Fund (EPI) attempts to track the performance of the WisdomTree India Earnings Index. It does this by investing at least 95% of its sizable $1.3 billion asset base in securities that make up the benchmark. The fund, which launched in 2008, holds Indian equities based on earnings that can be purchased by foreign investors. EPI’s top 10 holdings carry a cumulative weighting of 45%, with Reliance Industries taking up the primary allocation at 10.27% In total, the ETF’s basket includes about 350 stocks. A narrow average spread of 0.04% combined with daily volume of nearly 1.4 million shares keeps trading costs low. EPI charges an annual management fee of 0.85%, issues a 1.09% dividend yield and has retreated 8.63% over the past month as of Aug. 26, 2019.

The 200 SMA acted as a crucial support level in May, with the price bouncing from the area to print a YTD high at $26.66 on June 3. However, since this time, the ETF’s price fell away sharply before finding a floor near the bottom trendline of a descending channel. The relative strength index (RSI) recently ticked back above oversold territory, giving the fund plenty of room to test higher prices before consolidating. Those who take a trade should think about exiting 50% of the position near the channel’s top trendline while targeting overhead resistance at $26.50 for the remaining half. Protect capital by placing a stop under the August low at $22.24.

Chart depicting the share price of EPI.