EPI WisdomTree India Earnings Fund

Although many emerging markets have had a tough year, it is hard to find more than a couple of nations that were as hard hit as India. The world’s most populous democracy has seen extreme pressure thanks to a variety of factors impacting its economy including rampant inflation, slowing growth, and a weak currency. While the inflation issue seems to be slowing down due in part to the broader economic weakness, the currency issue is beginning to become an even bigger problem.

The rupee has been facing extreme weakness in recent weeks thanks in part to the broad risk-off trade in the marketplace as well as concerns over monetary policy. Many are questioning the country’s central bank and its ability to act to support the currency while still keeping inflation in check and growth from collapsing. This is already a problem as GDP growth was below 7% in the most recent quarter while the rupee has fallen by about 14.2% so far this year, making the currency the worst performer in all of Asia in the time period (see HDGE: The Active Bear ETF Under The Microscope).

While this currency weakness might be welcomed news in a number of Asian nations, it is not so in India as the country is a huge importer of energy products and an owner of a large current account deficit. As a result, prices are remaining elevated and the country’s borrowing costs are going up as well; yields on 10 year Indian bonds have risen nearly 100 basis points on the year to just under 8.85%. This is in stark contrast to other nations in the area as both China and South Korea saw drops for their comparable bonds, putting further pressure on the rupee in comparison.

All of these factors have combined to have a devastating effect on the country’s stock markets, pushing Indian securities to sharp losses on the year. This tumble was also far worse than other emerging countries in Asia, and especially so when compared to Southeast Asian nations. These nations have managed to hold steady so far in 2011 and could continue to serve as an alternate investment destination for investors looking for emerging Asian assets (see Inside The SuperDividend ETF).

Yet for investors still bullish on India or for those looking to dollar-cost average into the space, now could make for an interesting time to buy securities in the country. Indian firms have been beaten down but many still have strong fundamentals and ultra-low P/E ratios. For these investors, or for those seeking to make a short play on the beaten down Indian market, we take a closer look at three popular India ETPs and how they have held up in this difficult time:

WisdomTree India Earnings Fund (EPI)

This fund is the single most popular ETF tracking the India market with close to $800 million in AUM. EPI also does solid volume of close to three million shares a day giving investors a very liquid way to play the Indian market. Investors should also note that the product doesn’t track a market cap-based index, instead focusing in on the WisdomTree Earnings Index. This benchmark only includes firms that are profitable and can be bought by foreign investors, weighting firms by earnings rather than market capitalization (read the November ETF Asset Inflow Report).

This method produces a relatively-value laden portfolio of securities with large and giant caps dominating the list of top holdings. Firms such as Reliance Industries and Infosys (INFY) receive the two top allocations, while from a sector perspective, financials, energy, and technology take the top three spots making up nearly 54% of the portfolio. Despite this large cap focus, however, losses have still been pretty severe for EPI as the fund has lost close to one third of its value since the start of the year including close to 10% in the past month. The fund has been trending higher in recent sessions, although it clearly has a long way to go to get back to break-even.

Market Vectors India Small-Cap ETF (SCIF)

While large caps are an intriguing way to play the Indian market, small caps, with their greater growth potential, could be an interesting choice as well. One of the most popular funds in the space tracking the Indian market is SCIF from Van Eck. The fund, which has volume of about 70,000 shares a day and AUM of just under $38 million, tracks an index of small cap securities that are based in India, holding about 125 securities in total.

In terms of sectors, the fund offers a different experience than its large cap counterparts, focusing on industries such as consumer discretionary (22.8%) and industrials (22.4%). Yet with that being said, the fund does also afford a double digit weighting to financials and materials while providing the tech sector with a close to 10% weighting as well. Since the product consists of small caps, it is often time more volatile than its large cap counterparts outgaining them on the upside but also suffering greater losses when markets are tumbling. This was true once again in 2011 as SCIF has fallen by close to 47% on the year including a nearly 15.8% loss in the past month alone. Unfortunately, the product hasn’t come back as strong as its large cap-focused counterparts in recent days either, suggesting that concerns may still exist for consumer companies and other sectors that are more predisposed to pint-sized securities (read Forget FXI: Try These China ETFs Instead).

EGShares India Infrastructure Fund (INXX)

For investors seeking a truly unique way to play the Indian economy, it is tough to beat EGShares’ INXX. The fund tracks the Indxx India Infrastructure Index which is a free-float market capitalization weighted stock market index comprised of 30 leading companies that Indxx, LLC determines to be representative of India's infrastructure industries. Given the great need for more roads, airports, and general infrastructure in the country, this could be a lower risk way to play the economy while also giving investors higher growth potential if the Indian government spends as much on the sector as some are forecasting (Africa ETFs: Three Ways To Play).

Investors should note that INXX holds just 30 securities in its basket, charging investors a somewhat steep 0.85% expense fee for its services. Top industry weightings go to construction and electricity which both make up about 20% of assets while mobile telecoms and industrial metals & mining combine for another quarter of assets as well. Unfortunately, given the weakness in the Indian economy and concerns over inflation, it hasn’t been a very good time to be invested in the space as the fund has lost close to 36.4% year-to-date. Losses have been significant over the short term as well, as INXX has lost close to 12% in the past month, although it has started to bounce back in the beginning of December and could push higher if the Indian economy finally stabilizes.

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