India ETFs In Focus As Inflation Fears Mount

by on June 30, 2010 | ETFs Mentioned:

With the advanced economies of the world struggling with rising debt burdens, rising unemployment, and slumping consumer confidence, more and more growth-minded investors have turned their attention to emerging markets in recent years. Thanks to ongoing urbanization and relatively small debt burdens, developing economies have managed to generate positive GDP growth in an environment that has crippled advanced markets. China receives much of the attention, but the rapidly-expanding Indian market has been a welcome addition to many investor portfolios as well over the last year.

Now India’s economy is faced with an interesting dilemma. Inflation rates have been steadily on the rise; in May alone India’s wholesale price index, the primary inflation gauge for the country, was up a shocking 10.2%. Food prices in particular have seen a spike, which some predict will not end until the close of the summer. The spike in food prices is due in part to poor rains last year, but some suspect that current monetary policies have also played a role. To get inflation under control, the Reserve Bank of India was expected continue its gradual tightening policy. But now some suspect that rate hikes will pause, a move with potentially serious consequences.

“Facing rising inflation, investors thought, the central bank was on a steady tightening path that it would follow for some time,” writes Harsh Joshi. “But a recent liquidity crunch in the Indian banking system has created a sect in the market that believes the central bank will take a break instead. That would be a mistake.” Investors are unsure what to expect in the short term from India’s central bank, which is scheduled to meet on July 27. A growing number of investors expect that recent turmoil in global market could cause a temporary pause in the tightening cycle, although the majority seem to be anticipating a further rate hike. Some even anticipate that a rise in interest rates could come before the late July meeting if inflationary pressures continue to mount, but the country’s finance minister recently indicated that no major decisions would be made before the upcoming policy meeting. “It is left for RBI to decide in the last week of July,” said Pranab Mukherjee.

India ETFs In Focus

With anticipation building, India’s RBI will soon make a choice cheered by some and lamented by others. With difficult decisions on the horizon, we profile several ETFs that figure to be in focus in coming weeks as India addresses its growing pains [for more actionable ETF investment ideas, sign up for our free ETF newsletter].

WisdomTree India Earnings Fund (EPI)

This equity ETF tracks the WisdomTree India Earnings Index, a fundamentally weighted index that measures the performance of companies incorporated in India that are eligible to be purchased by foreign investors. Unlike most equity ETFs, EPI doesn’t track a market cap-weighted index, instead replicating the performance of a benchmark that weights holdings by earnings. As far as market sectors are concerned, this fund tends to focus on industrial materials (32%) and financials (23%) (see all of EPI’s holdings here).

S&P India Nifty Fifty Index Fund (INDY)

iShares’ INDY follows the S&P CNX Nifty Index, a benchmark that measures the performance of 50 large cap Indian stocks. Similar to EPI, this ETF allocated most of its assets to the industrial materials and financials sectors of the market. But unlike EPI, INDY does not venture away from giant and large market capitalization funds, focusing primarily on the biggest Indian companies by market cap (see INDY’s performance charts here).

Market Vectors Indian Rupee/USD ETN (INR)

Van Eck’s INR offers exposure to India’s currency, tracking the exchange rate of the U.S. dollar against the Indian rupee. If interest rates rise to control inflation, look for INR to realize gains. But if the Indian government decides that the stability of its financial sector is more important, and subsequently pauses its rate hike program, this fund could feel downward pressure (see INR’s fundamentals here).

Disclosure: No positions at time of writing.