India ETFs and ETNs Are Not the Best Emerging Market Investments

I usually enjoy reading columns by John Spence, whether they appear at Marketwatch or the Wall Street Journal online. Yet his latest feature on investing in India via exchange-traded vehicles provided little more than a run-down of the basics.

There's the Barclays iPath India ETN (INP) that tracks an index of roughly 60 companies including IT mainstay, Infosys (INFY). This exchange-traded note has moved 50% higher in 2009 alone. There's the first-to-trade WisdomTree Earnings Fund (EPI), which is up 47% and favors longer-standing, higher dividend producers. What's more, there's the PowerShares India Portfolio (PIN) with nearly 1/3 in energy companies as well as a 43% showing through 5/20/09.

What the YTD performance numbers don't tell you, however, is MORE important than what they do tell you. For one thing, nearly half of the YTD gains were picked up on Monday, 5/18, due to the favorable outcome in India's national election. Second, India investments dropped a monumental 65% from Feb 2008 to March 2009.

It follows that the oldest India ETF, the WisdomTree Earnings Fund (EPI), is still down 34% from its February 2008 inception price. India hasn't even kept pace with the S&P 500 SPDR (SPY) in the same time period.

Granted, investors should take note of investments that have nearly doubled off of their March lows. Yet the unabated, uncontested ride up should lead to some skepticism about the price movement's sustainability. Instead, AFTER the ginormous surge, we're reading about getting a ticket for a "Passage to India."

If I were to consider India's prospects versus those for the "West," I'd pick India. Yet smart portfolio construction essentially requires diversification across stock assets -- domestic, developed foreign markets and emerging markets. You're not likely to pile into one region or one country alone.

The easiest way to gain access to all emergers may be through the use of Vanguard Emerging Markets (VWO). This fund has performed on par with WisdomTree Earnings Fund (EPI) since 2/08, but provides greater diversification across the entire emerging space.

Nevertheless, many investors have become enamored with individual countries like China and India, as well as corresponding ETFs like the China 25 Index (FXI). Note: China FXI has outperformed India in the time frame discussed.

If you are determined to be a bull in an Indian eatery or a bull in a China shop, rather than invest pan-emerging-regions, it's important to accumulate technical data, fundamental data, economic info... even cultural info. You should be armed with the knowledge that'll help you choose what's right for you.

Technically speaking, China has the edge on a sustainable bull market run. China 25 (FXI) offered "higher lows" in March 09, whereas WisdomTree Earnings Fund (EPI) set "lower lows" alongside the U.S. Many believe this may be due to India's greater dependency on foreign countries, whereas China and Brazil have more substantial middle classes.

Fundamentally speaking, neither large cap India ETFs nor large cap China ETFs may be screaming bargains today. Each has surged approx 30%-40% from the last available P/E data of 3/31; China ETFs (FXI, PGJ) and India ETFs (PIN, EPI) had approximate P/Es of 12 at that point. Yet if one assumes relatively flat earnings over the last 6-7 weeks, P/Es would be closer to 16 right now. (Note: Small Cap China HAO still looks cheap, though!)

Economically, China has an edge on everything from housing starts to manufacturing activity to GDP growth to trade surpluses. And while India's information tech segment is the envy of most of the world, less than 1% of the workforce is employed there.

Culturally, it's hard to deny that Chinese emphasize education and entrepreneurship more than... well, more than Americans, Europeans, Middle Easterners and Indians. Again, when all is said and done, China is more likely than India to rocket out of the global doldrums.

Does that mean that I think India is a poor investment choice? No. I'm merely comparing apples to apples, suggesting that China is a better selection for one's emerging market portion of a portfolio. In the same vein, I am equally inclined to recommend the Vanguard Emerging Market Fund (VWO) for accumulation during pullbacks and/or corrections.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Rhunzzz:]

China has the more effective government and a huge warchest of foreign reserves.

India has the more open society and favourable demographics.

I'd put my money on India over China in the long run...

May 21 10:37 PM

[Option Trader:]

In more tangible terms, the chances of easing of investment caps in sectors and enabling foreign institutional investor's inflow is much higher in India than any possible changes in China. We`ll see a huge influx of liquidity and that should ease quite a few sectors such as realty and auto (which had been on a debt fueled binge). So India is probably a better bet than China in the short to medium term (1 -3 years). China on the other hand seems better poised to gain off a upswing in global economies with its excellent play with resources other acquisitions lately.

Agree with the author regarding not being enamoured with names, but definitely one has to be overweight china and india in the emerging markets. India more so in the short run.


On May 21 10:37 PM Rhunzzz wrote:

> China has the more effective government and a huge warchest of foreign
> reserves.
>
> India has the more open society and favourable demographics.
>
> I'd put my money on India over China in the long run...

May 22 02:04 AM

[dkp:]

watch weather reports in both countries.A good monsoon and bountiful crops will spell quicker economic growth.

May 22 06:59 AM

[NYHawkeye:]

Rather sad commentary. Here are a few gaping holes:

Entrepreneurship in China is a relatively new thing, mostly driven by exports (which are currently in the doldrums). Entrepreneurs in India have been building world class companies for decades.

China is a tough story in the short term given economic problems in its major export destinations. India's "exports" are a small section of the growth story. The larger story is internal demand generation driven by a middle class that's being given the opportunity to spend. The big Indian story is not software or "offshoring", but retail.

China has had good government. India just acquired it in the name of Manmohan Singh, the Prime Minister who got reelected with a mandate to bring about market reform.

Short term = India
Medium term = China
Long term = India (demographics don't lie).

May 22 09:57 AM

[Vikram Saxena:]

"Many believe this may be due to India's greater dependency on foreign countries, whereas China and Brazil have more substantial middle classes."

Indian economy is a lot more insular and less affected by foreign countries. China had to pump its economy with a massive stimulus package to ensure that the economy does not follow exports and collapse. India had to do an order of magnitude less to get similar results, since most of the growth in India is organic and not export driven.

Much of China's stimulus has been handed out as loans, whose future performance is uncertain. Though it has created a big buzz, it is not clear whether it will result in sustainable growth, in the absence of growth in exports.

May 22 05:57 PM