iShares, by far the most active ETF issuer on the product development front to this point in 2012, continued the aggressive expansion of its international ETF lineup this week with the debut of a new product targeting small cap Indian stocks. The new MSCI India Small Cap Index Fund (SMIN) becomes the third product to specifically target small Indian companies. SMIN will complement existing ETFs from iShares that target primarily large Indian companies, including the S&P India Nifty 50 Index Fund (INDY) and the recently-launched MSCI India Index Fund (INDA).
Under The Hood
The index to which SMIN will be linked consists of about 235 individual stocks, though the fact sheet indicates that the new ETF will hold only about 88 stocks at launch. Liquidity can be an issue even with some larger Indian stocks, so it wouldn’t be surprising if SMIN implements a sampling strategy that results in the underlying portfolio containing only a fraction of the total index.
The index has an average market cap of only about $400 million, and includes companies with a market cap of below $50 million. By comparison, the average market cap for INDA’s index is close to $9 billion, and the smallest company in that index has a market cap of $600 million.
Many investors have embraced small cap stocks as a way to achieve better “pure play” exposure to the underlying economy. The mega cap Indian stocks that dominate ETFs such as INDA and INDY are more likely to generate a significant portion of revenue in international markets, whereas small cap companies tend to hold stocks that rely more heavily on local consumption [use the ETF screener to find small cap international stocks].
Small cap ETFs also tend to offer a unique sector composition relative to their large cap peers; as shown below, SMIN will maintain a much heavier allocation to consumer discretionary stocks and a lighter weight to energy compared to INDA [see the SMIN fact sheet]:
| Sector | INDA | SMIN |
|---|---|---|
| Financials | 24.9% | 22.0% |
| Technology | 18.9% | 6.3% |
| Energy | 12.2% | 1.5% |
| Materials | 9.1% | 14.3% |
| Consumer Staples | 8.5% | 7.1% |
| Consumer Discretionary | 8.0% | 18.3% |
| Industrials | 5.6% | 16.1% |
| Health Care | 5.3% | 9.4% |
| Utilities | 5.0% | 4.3% |
| Telecom | 2.7% | 0.8% |
| Data for underlying indexes | ||
Another advantage of small cap ETFs is the balance of holdings; the top ten components of SMIN’s index represent only about 16% of total assets, whereas the top two holdings of INDA (Infosys and Reliance Industries) combine for close to 19% of that ETF’s total holdings.
Head-To-Head
SMIN will compete most directly with the EGShares Small Cap India ETF (SCIN) and Market Vectors India Small Cap Index ETF (SCIF), which have combined assets of about $70 million. SMIN will have the edge in expenses on the more established funds, as the new ETF has an expense ratio of just 0.74%. iShares also recently undercut fees on existing India ETFs with the launch of INDA; that fund charges 0.65% [see iShares: The Low Cost ETF Issuer?].
Excluding leveraged and inverse products, there are now ten ETFs offering exposure to Indian stocks, with combined assets of more than $2 billion. Indian stocks have emerged as the early leaders in 2012; many India ETFs have added more than 20% already this year, with the gains for the small cap funds topping 40%.
Disclosure: Long SCIN.
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