Which India ETF Is Best?

by on January 19, 2010 | Updated November 8, 2012 | ETFs Mentioned:

With interest rates at record lows and a cloud of uncertainty looming over the global economy, investors are finding it difficult to build a well-diversified portfolio that offers attractive upside potential without taking on considerable risks. Emerging markets, however, have been the center of attention in recent years as lucrative opportunities continue to present themselves in this promising corner of the market [see Free 7 Simple & Cheap All-ETF Portfolios].

Many investors looking to achieve emerging markets exposure often turn to China, impressed by its growing industrial sector and attracted to the potential that a rapidly-swelling middle class offers to technology and consumer companies. But options for emerging markets exposure go far beyond China. The tremendous growth in the Middle Kingdom has overshadowed equally-impressive results in India.

India’s Promising Economy

India is the world’s most populous democracy and is home to the world’s 9th largest economy by nominal GDP. Despite its large size, the country has been flying under the radar as a sleeping giant over the past decade. However, the country has taken major strides in recent years to affirm its position as a global economic power [see also ex-U.S. all-ETF model portfolio].

Following the election of the pro-business Indian National Congress in 2008, equity markets in India surged after market reforms were implemented and certain restrictions on foreign investment had been eased or lifted altogether. India’s economy grew by almost 8% in the third quarter of 2009, far surpassing analyst estimates.

Recently, however, India’s alarmingly large budget and trade deficits have sent up several red flags, making investors understandably bearish. Despite its thriving middle class, the country is plagued by socioeconomic turmoil: India currently holds the largest concentration of people living below the World Bank’s international poverty line. The pressures of transforming into a developed nation have forced Indian governments to ramp up spending on welfare programs. Another cause for concern stems from the country’s widening trade deficit and export growth slowdown, triggered by the lack of U.S. and European demand.

As of August 2012, however, the country managed to beat analyst’s expectations, logging in a GDP growth rate of 5.5% in the quarter ending June 2012, as compared with the previous year. Whether or not this is the bottom for India’s recent economic slump is yet to be determined. But it is important for investors to remember that as with all emerging market countries, volatility and uncertainty is to be expected: a trade-off investors are willing to take for relatively higher returns.

Estimates for the outlook of the Indian economy vary considerably, with some analysts predicting that the country could surpass the U.S. in the next 30 years. So for those willing to stomach the risk, India has certainly presented itself as a promising and compelling option

India ETF Options

In addition to diversified emerging markets funds and BRIC ETFs, which generally make a significant allocation to Indian equities, there are a number of ETFs that invest exclusively in India’s stock market:

Ticker ETF Expense Ratio Holdings Largest Sector Top Holding
EPI India Earnings Fund 0.83% 196 Financials (24.5%) Reliance Industries (8.5%)
INP MSCI India Index ETN 0.89% 72 Financials (29.3%) Reliance Industries (8.2%)
PIN India Portfolio 0.78% 52 Energy (23.0%) Infosys (10.6%)
INDY S&P India Nifty Fifty Index Fund 0.89% 51 Financials (28.3%) ITC Ltd. (8.7%)
INDA MSCI India Index Fund 0.65% 74 Financials (28.5%) Reliance Industries (8.0%)
SMIN MSCI India Small Cap Index Fund 0.74% 121 Financials (21.4%) Federal Bank Limited (3.5%)
SCIF India Small-Cap Index ETF 0.85% 100 Consumer Cyclical (17.9%) Housing Development & Infrastructure (3.8%)
SCIN India Small Cap ETF 0.85% 76 Financials (17.8%) Federal Bank Limited (5.0%)
INXX India Infrastructure ETF 0.85% 30 Utilites (25.1%) Ambuja Cements (5.3%)
INCO India Consumer ETF 0.89% 30 Consumer Defensive (50.1%) United Spirits (7.6%)
*As of 11/7/2012

iPath MSCI India Index ETN (INP)

The largest exchange-traded product offering exposure to Indian stocks, INP is actually structured as an exchange-traded note (ETN). Instead of holding a basket of securities that make up the relevant benchmark (in this case the MSCI India Index), ETNs are structured as senior, subordinated debt instruments. As such, holdings in INP expose investors to default risk [see INP's fact sheet here].

It should be noted that INP is somewhat top-heavy; the top ten components make up well over half of the portfolio, and a couple of stocks get allocations of 10% or more. There’s also a definite tilt from a sector perspective; financials and technology combine to make up more than 40% of the portfolio, while telecom, utilities, and health care represent just about 10% in total.

WisdomTree India Earnings Fund (EPI)

The fundamentally-weighted index underlying this ETF is designed to measure the performance of companies incorporated and traded in India that are profitable. Companies selected for inclusion are weighted based on their earnings in the prior fiscal year, meaning that those with negative earnings are excluded and those near break-even are given a minimal weighting [see EPI's technicals here].

Due to the weighting methodology of EPI, this fund gives a larger allocation to small and mid cap stocks than other India ETFs. Although large cap stocks receive the largest allocation in EPI, this fund does maintain exposure to firms of all sizes, as companies with a market capitalization of less than $10 billion account for more than 40% of total holdings.

PowerShares India Portfolio (PIN)

PowerShares’ India ETF is based on the Indus India Index, a benchmark composed of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges: 200 from the Bombay Stock Exchange and 200 from the National Stock Exchange. From this universe of potential components, Indus utilizes a proprietary rules-based methodology to determine its holdings. For cost conscious investors, PIN offers the cheapest way to gain exposure to Indian equity markets, charging an expense ratio of just 78 basis points [see PIN's fundamentals here].

iShares S&P India Index Fund (INDY)

iShares’ INDY is designed to track the performance of the S&P CNX Nifty Index. The “Nifty Fifty” is the leading index for large companies listed on India’s National Stock Exchange, offering exposure to all sectors of the economy. Investors looking for large cap exposure may like INDY, but its relatively high expense ratio and concentration among major holdings are potential drawbacks [see INDY's performance charts here].

iShares MSCI India Index Fund (INDA)

Another iShares’ offering, this ETF has almost an identical portfolio to INP, as both funds track MSCI India indexes. INDA, however, differentiates itself with its expense ratio of only 65 basis points, the cheapest in the India ETF category. While this fund is one of the newest India ETFs on the market, its ETF structure and lower expenses make it a strong competitor of the well-established INP. 

Small Cap India ETFs

There are currently only three ETFs that offer investors exposure to the small capitalization segment of the Indian equities market: SCIFSCIN, and SMIN. These ETFs serve as a better “pure play” on the local economy than products dominated by mega cap equities such as INP or PIN. For the cost conscious investor, the MSCI India Small Cap Index Fund, SMIN, is the best option, as its expense ratio comes in at 0.74%. SMIN also offers a much larger and diversified portfolio, with over 120 individual holdings. 

India Sector ETFs

For investors looking to establish a tactical tilt towards a particular segment of the Indian equities market, there are two options:

  • India Infrastructure ETF (INXX): This ETF tracks an index that is designed to measure the performance of 30 leading companies that are determined to be representative of India’s Infrastructure industries. Top holdings include Ambuja Cements, Tata Powre Co. and Bharat Heavy Electricals. 
  • India Consumer ETF (INCO): The fund tracks a 30 stock free float adjusted market capitalization index designed to measure the market performance of companies in the consumer sector of India. Ongoing urbanization and increases in levels of wealth and discretionary income stand to benefit India’s consumer sector tremendously. INCO focuses on this Indian consumer sector, positioning this fund to thrive as these trends play out.

Disclosure: No positions at time of writing.