New ETFs: Opportunity Awaits in Indian Small Caps

Some great news for investors who can only buy domestic based product: After the successful launch of Van Eck Global Brazil Small Cap earlier this year, a similar product is now slated for India. I am very excited about this, as one of my pet peeves has been the lack of mid-sized or even smaller type ADRs listed in US markets for either Brazil or India. You can throw a dart and hit a Chinese small or mid-cap, but have to dive under piles of hay looking for Brazilian / Indian needles.

No symbol yet, but per IndexUniverse.com:

• Van Eck has registered with the SEC a new exchange-traded fund that provides investors with exposure to India’s smaller companies. The Market Vectors India Small-Cap ETF will replicate the performance of the Market Vectors India Small-Cap Index.
• The prospectus did not list fees for the fund, although it did point out some of the risks. The new fund will invest in the more volatile side of India’s already volatile equities market, holding small-cap names with limited liquidity. Still, India has been a hot market for investors over the past year, and the new small-cap fund is likely to appeal to some.
• Van Eck has been targeting small-cap international as a new area for growth. Its Market Vectors Brazil Small-Cap ETF (BRF) has nearly $520 million in assets.
• There are three India-focused exchange-traded products on the market. The PowerShares India (PIN) ETF and the iPath MSCI India Index ETN (INP) both focus on large-cap companies. They have tallied returns year-to-date of 71.6% and 90.6%, respectively, according to Morningstar. The WisdomTree India Earnings Fund (EPI) dedicates nearly 20% of its portfolio to mid-caps, with the remainder being primarily large- and giant-cap offerings. The fund has posted year-to-date returns of some 88.2%.

We were huge proponents of the Brazilian Small Cap fund (our only mistake was not buying it in June) because the only comparable index product was a large cap offering that was extremely exposed to 2 companies - Petrobras (PBR) and Vale (VALE). Excellent companies, but if I want them I can go buy them. The small cap ETF is a lot more consumer oriented and offers countless stocks we can not buy here.

In the Indian space there are now three major ETFs (ETNs) which were an improvement over the two closed end funds I traded for years. In fact, we used the archaic 'The India Fund' here in our portfolio in 2007 and early '08. Reading that post in March '08, I had the same complaints then I have now.

For those of us "India bugs" out there, we've had very limited choices to invest in India. Due to a lack of individual companies listed on US exchanges I've been using The India Fund (IFN), which is a closed end fund

The three newer ETFs are generally very heavy on large caps and we see the same name over and over: Reliance Industries, Infosys (INFY), etc. In fact all three of the newer ETFs / ETNs have those two companies at a (roughly) combined 20% of the instrument; that's like buying GE (GE) and IBM (IBM) as 1/5th of your exposure to the US.

There are even fewer Indian companies on US exchanges than Brazilian. We've simply been using the two major banks (HDFC (HDB) and IBN) as our exposure, with an occasional foray into base metals stock Sterlite Industries (SLT). Aside from the "IT / outsource companies," I don't think there are more than 10 other Indian stocks available.

This is a very good move, and we'll see if the small caps (over time) diverge from the larger caps. Generally more growth (and risk) should come on the lower end of the size scale. Last I checked on how the two Brazilian ETFs were doing, the newer small cap had been trouncing the large cap.

On a side note, India has been acting a little tired lately. As with Brazil, I'd really like to see some correction after a huge run in 2009. Maybe we can only ask for pullbacks to the 50-day moving averages in this era of central bank largess.

Disclosure: Long HDFC Bank in fund; no personal position

Comments

[Uppai Mappla:]

As an investor stationed in India, I have always thought why the ETFs and MFs of Indian stocks offered only heavyweights, which have become quite overvalued. There are many small and mid cap companies run by honest and efficient management that are still languishing at not much above their bear market prices.
So small and midcap mutual funds will give the rewards of India (and terrible risks too, if stocks are not carefully chosen!) for international investors. But I would prefer an actively managed mf here rather than etf, because in the long run the main index usually outperforms a small and midcap index (unless one gets in at the height of doom and gloom when smallcap gems lay strewn around like pebbles, as it happened in March 2009).
But I think the fund managers have to "think India" and look from the common man

Oct 30 10:02 AM

[Uppai Mappla:]

Sorry, here's my comment in full:

As an investor stationed in India, I have always thought why the ETFs and MFs of Indian stocks offered only heavyweights, which have become quite overvalued. There are many small and mid cap companies run by honest and efficient management that are still languishing at not much above their bear market prices.
So small and midcap mutual funds will give the rewards of India (and terrible risks too, if stocks are not carefully chosen!) for international investors. But I would prefer an actively managed mf here rather than etf, because in the long run the main index usually outperforms a small and midcap index (unless one gets in at the height of doom and gloom when smallcap gems lay strewn around like pebbles, as it happened in March 2009).
But I think the fund managers have to "think India" and look from the common man's point of view.
For example let me tell you about one sector I am very bullish about for India in the medium to long term: brokerages. World over, investors tend to get into brokerages only at the overheated stages of a bull market because the market is quite saturated for brokerages. The vast potential for ONLINE brokerages in India will be clear when you consider the following:
(1) Only 4% of Indians invest in equities in any form. Their numbers are about to explode.
(2) The young middle class Indians are increasingly computer and internet savvy. Mobile computing and mobile trading is growing.
(3) Mobile (and increasingly Net) connectivity in India is the cheapest in the world and is getting cheaper. I have seen beggars carrying mobile phones!! A huge young population (both literate and semi literate) is about to get into Internet trading.
(4) Several Indian brokerages offer international quality connectivity, security and software suitable for mobile computing.
(5) In my view the strongest candidates for growth here are the following brokerages:
(a) Indiabulls Securities. They have been awarded the highest rating by CRISIL for online safely. Also from 1995 onwards I find them improving the quality of their services and reducing human dependence and increasing automation. They were actually closing their reduntant offices when the bull market was raging in 2007 when some other brokerages were opening. In North India, especially Delhi, they are the preferred brokerage. Their helpline is also getting better and better so the investor sitting anywhere in the world can, without ever making a phone call, trade seamlessly with them.
(b) Geojit BNP Paribas. This is a south based brokerage has a rare squeaky-clean image. They were also the first brokerage to start online trading in India. Last year BNP Paribas acquired majority shareholding and they are now making inroads into Gulf countries as well as in India.
The brokerage sector in India illustrates my point that Indian small-cap mutual funds meant for international investors should be actively managed and the fund manager and his team should have their ears close to the ground realities and special needs of the masses of India, especially small towns and rural India. I hope more such funds will appear in future.

Disclaimer: I am a long term investor in both Indiabulls Securities and Geojit BNP Paribas.

Oct 30 10:05 AM

[Khargosh:]

Uppai: Is it a typo> you said about indiabulls being there from 1995. I am sure they were there only from 2002. Certainly not before 2000. I like your comments but do be accurate.

Oct 30 10:44 AM

[Uppai Mappla:]

Yes it was a typo. Thanks for pointing it out.

Oct 30 11:06 AM

[Uppai Mappla:]

Robin: Brokers make money in both volatile and trending markets. Their taps starts to turn off only at the pit of the bear market. Unfortunately brokers also have human weaknesses and many of them acquire swanky new offices and take in more staff near the top of the bubble, often borrowing big time. As investors our task is to seek out brokers who did not make this elementary mistake, plus of course those brokerages that have vision, scalabilty, tech savviness, management integrity, great staff etc.

The true bear market depths, when brokers’ taps run dry, are periods when investors are not investors anymore and stocks are never mentioned in decent conversation. They aren’t even bear markets because both bears and bulls are away. Such periods typically last only a few months. Wise brokers use their cash to acquire cheap offices and hire great staff for the coming bull market. That's one reason I like Indiabulls Securities which was actually closing offices in 2007 as part of their overall strategy of increased mechanization. Geojit, on the other hand, was opening new offices all through 2007 and 2008 (some of them overseas) but I consider them as an exception because they had the money power of BNP Paribas.

But I know several sub brokers of Cochin Stock Exchange who went down in the crash of January 22, 2008 and those who tried to limp on were completely slaughtered in September 2008.

So as investors our task is to choose the ones that will be around when the next boom starts. Many investors hunt for the "next big thing" that will drive the next bull market whether it happens now or in 2011. In my opinion brokers are going to be benefited max, especially those who are lean and mean and--specifically in India--who have fine-mesh nets that catch the young computer savvy retail investors--not HNIs and institutions. That's why I mentioned Indiabulls and Geojit. Of course there are others like 5 paisa, sharekhan, indiainfoline which may be equally good or perhaps better. But I don't know them well.

In final answer to your question: if you invest in brokerages now, you need to have a time frame of at least two years. For all we know we could have another crash before the great big long-term rally that we all are waiting for!

On Nov 10 08:09 PM robin kerala wrote:

> Dear Mr Uppai the broker house investments is a baloon method naa..
> mostly the broker firms boomed upon the day trading method. it rather
> makes in a bullish trend only naa.. a/to kerala's investors/traders
> all are eagerly trades when the mkt get in upper move.
> but can we predict if the market dipped in a long run and the trades
> become low...hw these houses'll perform? plz explain

Nov 11 09:17 AM