Emerging market ETFs were hailed as a must buy for all portfolios after 2010 watched a number of these product produce eye-popping returns. But last year had other things in mind, as the majority of these products felt the pinch of volatile markets and endured a hefty slide. The combination of euro woes along with negative economic indicators in the US, namely the downgrade in our credit quality, shattered investor confidence in these investments as their prices entered a dangerous nosedive. Among the biggest losers was India, the world’s second most populated country [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].
A key member of the BRIC, India has long been one of the world’s premier growth stories, though it often falls in the shadows of China, which has also been experiencing growth at an astounding pace. 2011 was an especially tough year for India ETFs, as a number of them struggled with the volatility and negative global economic outlooks. But now that 2012 is well underway, the Indian economy is singing a different tune and the ETFs that track it have been on a tear.
After a few sluggish months, the Indian economy began to pick up in December of last year and it has kept this bullish momentum through the new year. Some of the biggest momentum for the Indian economy has come from Composite Leading Indicators (CLIs) that are calculated by the Organisation for Economic Cooperation (OECD). “The CLI for India rose to 95.6 in December, 2011, from 95.1 in November. In September and October last year, the same stood at 94.6″ writes Press Trust of India. These same calcultions also showed a nice pickup for both the U.S. and Japan, while other nations like Brazil and China were given negative outlooks based on these figures [see also Beyond EEM: Alternative Emerging Market ETF Options].
With Brazil and China on the brink of slowdowns, India is sure to get a bit more investor attention, which may help to boost its economy. Another important factor is the confidence that investors have in Indian markets, as the country was rated the world’s most optimistic market for the eighth consecutive quarter. The robust optimism comes from high domestic consumption levels that are key for emerging market growth. But investors should be warned that while Indian equities have rebounded from their 2011 losses, the outlook for the economy is somewhat shaky.
The coming year is predicted to see a drop in GDP growth as well as continued inflationary pressures that can weigh on an economy. While these issues are typical of any emerging market, they have the ability to have a significant impact on an investment and could effectively bring this rally to a screeching halt. With the risks in mind, investors looking to cash in on this bullish trend have a number of intriguing ETF options. Below, we outline three funds to play India’s red-hot economy [see also The Ten Commandments of Commodity Investing].
India Earnings Fund (EPI)
EPI is the most popular fund offering exposure to Indian equities with over $940 million in assets and a nice daily trading volume of roughly 2.6 million. The fund holds over 160 securities in its portfolio, the majority of which are focused on financial services and energy; a typical sector-bias for emerging market product. After lobbing off 40.4% of its price in 2011, EPI has come back with a vengeance as it has already tacked on 29% in 2012. Note that the fund has a relatively high expense ratio of 83 basis points, but for those with E-Trade and TD Ameritrade accounts, you can trade this ETF commission free [see also Seven Factors Every Investor Needs To Know About Emerging Market ETF Investing].
MSCI India Index ETN (INP)
This ETN seeks to represent approximately 85% of the free-float-adjusted market capitalization of equity securities by industry group within India. INP has over $560 million in assets and an ADV of 110,000. Similar to EPI, this fund grants a significant weighting to financials and energy, though it should be noted that information technology comes in as the second biggest sector. INP reported losses of 40% last year, but has turned things around by raking in over 25% to start off 2012.
India Portfolio (PIN)
This ETF is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. PIN is the cheapest of these three India products, charging just 78 basis points for investment. From a portfolio composition perspective, PIN is a bit on the shallow side as it only tracks 50 stocks and gives its top ten holdings over half of its total assets. Some investors may like this more concentrated play while others demand more diversity from an emerging markets product. Like the two aforementioned funds, PIN has dismal losses in 2011, bringing in a return of -36% on the year. But also like the other two product, PIN is outperforming in 2012, with gains topping 22% year-to-date [For more emerging market analysis, see our BRIC-or-Bust ETFdb Portfolio].
Disclosure: Photo courtesy of Scott Dexter. No positions at time of writing.