EPI WisdomTree India Earnings Fund

The Indian economy can be considered one of the dominant economies in the world thanks to its attractive GDP growth rate of approximately 7.5%, and the incredible size of the market. Furthermore, the country has seen more liberalized trade and pro-business practices including broad programs in terms of privatization, capital market reorganization and industrial policies all of which have helped to keep growth levels high in the country.

In fact, even during 2008, when many of the major nations in the world were facing market turmoil, India delivered a suburb growth rate of 6%. In addition to this strength, domestic consumption has also been rising, making India less impacted by foreign shocks than some of its more export-oriented peers in the region.  

Impressive investment in the country by the Foreign Institutional Investor also added to its advantage coupled with falling inflation over the past six months. Liquidity across the nation has also improved, largely thanks to the Cash Reserve Ratio (CRR) reduction being made two times by the Reserve Bank of India (RBI). (Top Three Emerging Market Consumer ETFs)

There are still some significant risks to the Indian economy despite the many positives of the nation. In the past month, investors have seen a rise in the inflation rate in India which, if it continues, may hamper the purchasing power for citizens in the country.

However, an interest rate cut by the Central Bank is also on the horizon which may boost inflation even more. Additionally, rising oil prices remains a matter of concern for the economy as India imports more than 70% of its oil, suggesting that there are definitely headwinds to the economy.  

Nevertheless, investors have a variety of options to play the Indian stock market. However, investors should note that due to capital controls and high expense ratios, many Indian ETFs are not nearly as popular as some of their other BRIC counterparts. Additionally, the performance in the Indian market hasn’t been robust to say the least over the past few years.

In 2011, for example, India’s ETFs saw a major setback as the economy was surrounded by high inflation, a falling rupee, and lackluster foreign capital investment. Fortunately, 2012 has delivered a completely new scenario to the country. FDI has poured in and the stock market is on a nice bull run, adding almost 20% when compared to December lows.(India ETFs: Behind The Crash)

For investors intrigued by these trends, there are a number of options available. We think that given the risks of the market, it could be ideal to focus on some of the large cap ETFs in the space, including the three following funds:

WisdomTree India Earnings Fund ETF (EPI)

Initiated in February 2008, the fund seeks to track the performance of the WisdomTree India Earnings Index. This fundamentally weighted index focuses on companies which are traded in India and are profitable and eligible to be purchased by foreign investors. The fund currently holds a total of 161 stocks with 39.39% of net asset in the top 10 holdings.

EPI is highly exposed to the financial sector which makes up 26.3% of assets while it is light on consumer staples and telecommunication services. Attributable to the volatility in the Indian market in fiscal 2011, the fund has delivered a negative return of 15.49% over a period of one year while it isn’t cheap compared to broader funds; the product has an expense ratio of 83 basis points.

PowerShares India Portfolio ETF (PIN)

The fund was initiated in May 2008 and was designed to replicate, before fees and expenses, the performance of the Indian Equity market as a whole through a group of 50 stocks. These 50 stocks represent the largest stocks listed on the National Stock Exchange (NSE) and Sensex, the two major indices of Indian market. The fund has a total holding of 50 stocks and charges investors fees of 78 basis points.

The fund is highly concentrated in its top 10 holdings with more than 50% of its assets going to this group of securities. This means that the fund is not spread out and does not offer immense diversification benefits. Infosys Ltd occupies the top position in the fund followed by Reliance Industries Ltd and Oil & Natural Gas Corp. Ltd, ensuring that the energy sector is the biggest from an industry perspective.

Possibly due to the high concentration risk and volatility in the market, the fund delivered a negative return of 35.47% over the past year, although it has bounced back strongly in 2012.

iShares S&P India Nifty 50 Index Fund ETF (INDY)

Introduced in November 2011, INDY is the most recent addition in the Indian large cap ETF space. The product seeks to track the performance of the S&P CNX Nifty Index which consists of 50 of the largest Indian companies. The fund holds 50 stocks in total but puts over half of the portfolio in the top 10 companies.

The fund has an expense ratio of 89 basis points and appears to be focused on large cap companies of India. However, the concentration risk of the company is high and assets are not spread among a variety of firms (see the Zacks ETF Center for more info on ETF Investing).

Again, Infosys Ltd and Reliance Industries Ltd takes the top 2 position in the top 10 list although the sector breakdown is a little different. Banks takes the top position in terms of sector holding While the fund has delivered a total return of 36.34% over the trailing one year period.

India ETF Outlook

India ETFs did not perform well in the last year attributable to the global crisis, instability in the market and higher inflation; however, 2012 look to be a different scenario for global markets as well as Indian stocks in particular. Global growth, although expected to be somewhat tepid, could give emerging markets like India an opportunity to lead, especially if domestic consumption drives prices higher.  

In particular though, the growth for India’s economy this year could be quite high, with many putting it in the range of 7% to 10% for the year. Given this high growth, and FII’s inflows into the market, 2012 could be a great bounce back year for India, suggesting that an allocation to the nation’s ETFs could be long overdue for many investors (Three Overlooked Emerging Market ETFs).

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