India ETFs: Five Ways To Play

by on August 26, 2010 | Updated August 27, 2010 | ETFs Mentioned:

As emerging markets have raced ahead of their developed counterparts in the last two years, investors around the globe have begun to tilt portfolios more heavily towards securities that many have historically perceived to be excessively risky. The inflows into equity ETFs serve as one piece of evidence of this trend; through the first seven months of the year domestic equity funds took in about $3.3 billion, while international equity ETFs saw inflows of nearly $14 billion. Now, with the U.S. economy showing signs of weakness, investors have become particularly interested in emerging markets that have the potential to “decouple” from their developed counterparts, potentially shielding themselves from weakness elsewhere in the world and using internal resources to continue plowing ahead [see Beyond the BRIC:  Ten Country-Specific Emerging Markets ETFs]. 

India is an intriguing–albeit risky–option for investors looking to establish exposure to an emerging market that can thrive even without demand from the developed world for its products. India has grown at a fascinating pace, with a GDP growth projection north of 7% for 2010. With this growth comes an increase in need for natural resources; India is becoming one of the largest oil consumers in the world.

The country also has a swelling labor force that continues to fill with a relatively young population heading towards the peak of their spending power. This unique demographic profile is the primary source of the country’s tremendous economic potential; the population is expected to surpass China’s population by 2030 making India the most populous country in the world. Much of that growth will come in the middle class, which is expected to triple in size over the next 15 years, growing to twice the size of the entire U.S. population in that time period. As that trend progresses, demand for housing, automobiles, electronics, and other consumer goods is expected to skyrocket.

India is perhaps best known for its inexpensive service industry, which currently makes up over 50% of the nation’s GDP. Most emerging economies have relied on exports of low-priced manufactured products to achieve rapid growth while India has maintained a more domestic strategy–giving higher priority to developing its service industry and biotechnology, with a focus in producing generic drugs [see Healthcare ETF Options: Alternatives To XLV].

India’s path to economic super star status is certainly not without obstacles. The most populous democracy has issues regarding inflation; the Reserve Bank of India has struggled to control surging prices [see India ETFs In Focus As Inflation Fears Mount]. Inflation has now hit double digit figures, but officials are reluctant to raise rates based off of the poor world economic standing, especially in the euro-zone which is one of India’s major trading partners.

India ETF Options

Once upon a time, investors looking to invest in India had basically two options: they either had exposure via BRIC funds or they simply didn’t have any exposure at all. Thanks in part to the impressive rise of the ETF industry, investors now have the ability to target various corners of Indian markets, including exposure to certain market caps, sectors, and even the Indian currency. Below we outline ten ETFs grouped into five broader strategies, ranging from infrastructure investment to buying the rupee [for more ETF ideas, sign up for our free ETF newsletter].

Large Cap

The most popular ETFs offering exposure to India’s economy are dominated by large cap equities, including well known firms like Infosys and Reliance Industries. Currently, there are four ETPs focusing primarily on large cap Indian stocks:

  • iPath MSCI India ETN (INP): This product is actually structured as an exchange-traded note (ETN), meaning that it is a senior, unsubordinated, unsecured debt instrument linked to the MSCI India Total Return Index. INP offers exposure to giant and large cap stocks, top holdings of the underlying index include India’s largest private sector company, Reliance Industries (13%), IT firm Infosys Technologies (10%), and Indian Bank ICIC Limited (6%). From a sector perspective, industrial materials (32%) and financials (25%) receive the largest weightings. INP charges an expense ratio of 0.75%.
  • PowerShares India ETF (PIN): This ETF tracks the performance of the Indus India Index, a benchmark that aims to replicate the Indian equity market through investing in 50 of the largest companies in India. Similar to the India ETN, PIN’s major holdings include Reliance Industries (10%) and Infosys (10%). PIN charges an expense ratio of 0.78%.
  • iShares S&P India Nifty Fifty Index Fund (INDY): This ETF is linked to the S&P CNX Nifty Index, a benchmark the measures the performance of 50 large cap Indian stocks. INDY’s top three holdings are the same as IPN: Reliance Industries Limited (12%), Infosys (9%), and ICIC Bank Limited (6%). INDY charges an expense ratio of 0.89%.
  • WisdomTree India Earnings Fund (EPI): This ETF is the largest offering exposure to India, and utilizes a slightly different methodology than those profiled above. EPI tracks the WisdomTree India Earnings Index, a fundamentally weighted benchmark that measures the performance of Indian companies that are profitable and eligible to be purchased by foreign investors.

Small Cap

Some investors prefer to access international equity markets through small cap stocks, as these securities can often serve as more of a “pure play” on the local economy by offering exposure to sectors that large cap funds tend to overlook. Currently, there are two options for exposure to small cap Indian stocks:

  • EG Shares India Small Cap ETF (SCIN): This fund provides exposure to the Indian small cap sector by tracking the performance of the Indxx India Small Cap Index, a free float market capitalization weighted stock market index comprised of 75 Indian companies. Most investors have likely never heard of the major holdings for this fund such as: Patni Computer Systems (3%), Indian Bank (3%), and Mangalore Refinery (2%). In the fund’s two month life it has gained 7.14% and charges an expense ratio of 0.85%.
  • Market Vectors India Small-Cap ETF (SCIF): This recently-launched ETF also targets the small cap sector of the Indian market, seeking to replicate the Market Vectors India Small-Cap Index.

Infrastructure

Perhaps India’s biggest hurdle on the road to becoming a global economic powerhouse is the country’s infrastructure–or lack thereof. Overcrowded road and rail systems serve as a major drag on efficiency, complicating the shipments of goods within the country. That may also create an investment opportunity, as the Indian government has committed to a massive spending plan designed to build out the country’s overburdened infrastructure system. For those looking to make a play on India’s infrastructure, there’s an ETF for that:

  • EG Shares India Infrastructure ETF (INXX): This ETF seeks to replicate the Indxx India Infrastructure Index, a free float market capitalization weighted stock market index comprised of 30 companies that are determined to be representative of India’s infrastructure industry. INXX’s major holdings include the state-owned gas transportation company GAIL India (6.73%), engineering and construction firm Larsen & Toubro (5.53%), and Jindal Steel & Power (5.51%).

Currency

Some investors find value in adding exposure to emerging markets currencies to traditional stock-and-bond portfolios, embracing the diversification this asset class can offer:

  • Wisdom Tree Dreyfus Indian Rupee Fund (ICN): This ETF can be thought of as an investment in Indian money markets; it seeks to achieve total returns reflective of both money market rates in India available to foreign investors and changes in value the Indian rupee relative to the U.S. dollar. ICN charges an expense ratio of 0.45%.
  • Market Vectors Indian Rupee/U.S. Dollar ETN (INR): This ETN also offers exposure to the Indian currency, aiming to replicate the performance of the S&P Indian Rupee Total Return Index.  INR charges an expense ratio of 0.55%.

Leveraged India ETFs

For investors looking to make a leveraged play on India, there are a couple of interesting options out there:

  • Direxion Daily India Bear 2x Shares ETF (INDZ): The ETF seeks to deliver daily returns equal to -200% of the daily movement in the Indus India Index, which consists of a group of 50 large cap Indian stocks.
  • Direxion Daily India Bull 2x Shares ETF (INDL): This ETF is the bull counterpart to INDZ, seeking to deliver daily returns equal to 200% of the daily performance of the Indus Indian Index.

Disclosure: No positions at time of writing.