Which India ETF Is Best?

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 |  Includes: ASIA, EPI, INDY, INP, PIN
by: Michael Johnston

As developed economies struggled to regain their footing in the wake of the recent economic downturn, many investors have been drawn to the potential for meaningful growth offered by emerging markets. While recovery efforts in the U.S., western Europe, and Japan have been slow to gain traction and deliver meaningful economic expansion, developing markets have surged ahead, showing no ill effects of the recession and even sparking concerns of overheating.

Many investors looking to achieve emerging markets exposure have turned to China, impressed by the still-booming 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 is the world’s most populous democracy and is home to the world’s 12th largest economy by nominal GDP. Following the election of the pro-business Indian National Congress in 2008, equity markets in India surged as market reforms have been implemented and certain restrictions on foreign investment have been eased or lifted altogether. India’s economy grew by almost 8% in the third quarter of 2009, far surpassing analyst estimates. While some bumps in the road have appeared, India has established itself as one of the bright spots in the global economy.

India’s service industry accounts for approximately half of GDP, with the industrial and agricultural sectors accounting for another 45% in aggregate. The majority of jobs are in the agriculture, including farming of rice, wheat, cotton, sugarcane, and livestock. 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.

Reliance Industries is the largest private sector conglomerate in India, and is held by as many as one in every four Indian investors. Oil operations are at the core of Reliance’s operations, but the company has diversified its operations significantly in recent years. Due to its massive size relative to other Indian stocks, Reliance generally accounts for a significant portion of India fund allocations.

ETFdb Pro members can see the significant allocation given to India in the ex-U.S. all-ETF model portfolio ETFdb Pro Members Only (if you’re not a Pro member yet, sign up for a free trial or read more here).

India ETF Options

India ETF Options Are NumerousIn 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:

iPath MSCI India ETN (NYSEARCA: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.

Introduced in 2006, INP was the first ETP to offer exposure to Indian markets and now has a total market capitalization of more than $1.2 billion. Average daily volume of more than a half million shares is attractive, but the highest expense ratio in the group and the potential drawbacks of the ETN structure are causes for concern.

WisdomTree India Earnings Fund (NYSEARCA:EPI)

WisdomTree is known for its line of fundamentally-weighted ETFs, and EPI is one of the issuer’s most popular products. The 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.

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 (NYSEARCA: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.

iShares S&P India Index Fund (NASDAQ:INDY)

iShares’ INDY is the latest India ETF to hit the market, launched in November 2009 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.

India ETFs Head-to-Head

While the four ETFs profiled above are similar in many respects and generally exhibit strong correlation with one another, they are far from identical. Differences in depth of exposure, expenses, weightings methodologies, sector allocations, and concentrations among mega-cap firms are among the factors to be considered when choosing an India ETF (click image to enlarge):

Coming Soon: Targeted India ETFs

Existing India ETFs offer diversified exposure to all sectors of the economy, and are generally dominated by holdings in large cap companies. But more targeted exposure to the Indian economy may soon be available through ETFs, as Emerging Global Advisors has filed for approval on both an India Infrastructure Fund and an India Mid Cap Fund. The infrastructure ETF would be based on an index composed of 50 Indian infrastructure stocks, while companies eligible for inclusion in the mid cap ETF would have a market capitalization less than the smallest company in the S&P CNX Nifty Index (the benchmark underlying INDY).

Disclosure: No positions at time of writing.