Comparison of India ETF and ETN Opportunities
Selecting large-cap India ETF is only one of many possible ways to get exposed to Indian stock market. You can also invest in small-cap, inverse, leverage or ETN.
Why Would You Invest in India?
India is next to China one of the most interesting emerging markets to invest in. compared to developed countries (U.S., Western Europe, Japan), which are still facing many economic problems after the last financial crisis, Indian economy is on the right track even to overcome U.S. economy in the next 30 years in terms of GDP.
One of the key benefits of Indian economy is definitely young and knowledgeable English speaking people. India is currently the 12th largest world economy by nominal GDP, where service industry represents about half. Industrial and agricultural sector represent another 45%. Majority of people is working in agriculture business, including farming of rice, wheat, cotton, sugarcane and livestock.
Similar to other emerging markets, it was difficult to invest in India a few years ago. But things have changed and in recent years also Indian equity markets opened to foreign investors. This is one of the reasons why Indian stocks surged so high. However, economists believe that the market is not yet overheated in the long-term perspective, especially if Indian economy will continue with the high growth rate of GDP (it was 8.6% in the first quarter of 2010, 8.9% in the second quarter and 8.9% in the third quarter of 2010).
India ETF Universe
So, what choices does an investor have to gain exposure to this fast growing economy? Selecting appropriate Indian ETF is the smartest choice in most cases, while there are also some other possibilities.
Large-Cap India ETFs
While investors love BRIC combination to expose to fastest four growing emerging markets: Brazil, Russia, India and China, there are also some exchange traded funds where India weighting is almost 100%. Among best India ETF options are WisdomTree India Earnings Fund (EPI), S&P India Nifty Fifty Index Fund (INDY), and PowerShares India Portfolio (PIN).
WisdomTree India Earnings Fund (EPI) is the largest India ETF with market capitalization of $1,411 million U.S. dollars on 28. Of January 2011. EPI has around 140 holding in its portfolio, where top 10 holdings present about 43% share. The largest three holdings are Reliance Industries: 12.70%, Infosys Technologies: 7.10%, and Oil & Natural Gas Corporation: 5.49%. Almost 23% of portfolio is exposed to energy sector, 21% to financials, 18% to industrial metals, 12% software, 9% consumer goods and so on. What is interesting about this India ETF is that it is tracking fundamentally-weighted index, which measures the performance of profitable Indian companies (companies with negative earnings in prior fiscal year are excluded from the index, while strongest earnings present higher company weighting in index). Because of this specific, EPI has also larger allocation to small and mid cap stocks than other India ETFs (almost 15%).
The second largest and most traded India ETF is PowerShares India Portfolio (PIN) with market capitalization of $492 million U.S. dollars on 28. Of January 2011. PIN has around 50 holdings in its portfolio, where top 10 holdings present about 53% share. Similar to EPI, the largest three holdings are Reliance Industries, Infosys Technologies, and Oil & Natural Gas Corporation. Energy sector holds about a quarter of portfolio, followed by software 17%, industrial metals 16%, financials 12%, utilities 9%, consumer goods 9% and so on. PIN is tracking an index which is composed of selected stocks traded on Bombay Stock Exchange and National Stock Exchange. PIN represents a cost effective way to investing in India, with only 0.78% expense ratio.
The third large-cap India ETF is S&P India Nifty Fifty Index Fund (INDY), which was launched in November 2009. On 28. Of January 2011 its market cap was $165 million U.S. dollars. It has only around 50 holdings, which is similar to PIN. Top 10 holding present 56% share of total portfolio, making it less diversified among the three compared. Top three holdings are Reliance Industries: 9.81%, Infosys Technologies: 9.08%, ICICI Bank: 7.26%. The strongest sector in this ETF is financials with 26% share. Industrial metals represent 19%, consumer goods 14%, software 14%, energy 13% and so on. INDY is tracking the index composed of the largest companies traded on the National Stock Exchange.
Small-Cap India ETF
India Small-Cap Index ETF (SCIF) has more than 110 holdings, where top 10 represent less than third of total portfolio. ETF is tracking index composed of small cap Indian companies. Top three current holdings are India Infoline: 4.50%, IFCI: 4.00%, and GTL: 4.00%. The largest sector is industrial metals 34%, followed by financials 20%, software 13%, consumer goods 7%, energy 6%, business services 6%, and so on.
India Inverse and Leveraged ETFs
If you are looking for more dynamic exposure to Indian stocks, Direxion Daily ETFs might be what you are looking for. Direxion Daily India Bull 2x Shares (INDL) is a long ETF offering you 2-times daily exposure to the Indus India index.
On the other side, you have the possibility to trade falling India stocks with Direxion Daily India Bear 2x Shares (INDZ). Opposite to INDL, this ETF tracks opposite 2-times daily movement of Indus India index.
Let me remind you, that short and leveraged ETFs are suitable for active management and shorter durations.
India ETNs
iPath MSCI India Index ETN (INP) is actually one of the largest products offering exposure to Indian stocks. Its market capitalization was $906 on 28. Of January 2011. A quick view over the INP portfolio suggests many similarities with INDY. There are similar number of holdings, similar share of top 10 holdings, the same top 3 holdings, and similar sector breakdown. However there is one important difference. INDY is an ETF, while INP is an ETN. As you might know, exchange traded notes (ETNs) are similar to exchange traded funds (ETFs) with one big difference. With ETNs investors is exposed to default risk of issuer, because ETNs are structured products falling in category of subordinated debt instruments. This ‘little’ difference could be important especially in times like the last financial crisis.
India ETFs Head by Head
| Ticker | India ETF (link to fund provider) |
Expense Ratio | Dividend |
|---|---|---|---|
| EPI | WisdomTree India Earnings Fund | 0.88% | Annually |
| PIN | PowerShares India Portfolio | 0.78% | Quart. |
| INDY | S&P India Nifty Fifty Index Fund | 0.89% | 6 mon. |
| SCIF | India Small-Cap Index ETF | 0.91% | Annually |
| INDL | Direxion Daily India Bull 2x Shares | 0.96% | Quart. |
| INDZ | Direxion Daily India Bear 2x Shares | 1.00% | Quart. |
| INP | iPath MSCI India Index ETN | 0.89% | N/A |
Written by: Goran Dolenc
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