Once upon a time, almost all ETFs offering exposure to international equity markets consisted of the largest and most liquid stocks traded in a specific country or region. Because financial institutions and oil companies tend to be the largest companies by market capitalization, most international ETFs maintain heavy tilts towards these sectors. But the last few years have seen the introduction to a number of ETFs offering an alternative to mega cap-heavy exposure, as funds focusing on small cap stocks have hit the market. Brazil (BRF), Canada (CNDA), Japan (JSC) (SCJ), South Korea (SKOR), and Taiwan (TWON) are just a few of the markets covered by various small cap ETFs.
Now we can add India to that list. New York-based Emerging Global Advisors, the firm perhaps best known for its sector-specific emerging markets ETFs, announced today the launch of the INDXX India Small Cap ETF (SCIN). SCIN becomes the fourth ETF offering pure play exposure to the Indian equity market, but is the first to focus exclusively on the country’s small cap equities. Robert Holderith, President and CEO of EGShares, said in a press release:
We’re very excited about launching the world’s first India Small Cap ETF. We believe that until today, India exposure through ETFs has been limited and the offerings have been very similar. With almost zero overlap in holdings vs the current ETF offerings and a meaningfully different industry allocation, our fund attempts to provide exposure to some of the fastest growing companies in one of the world’s fastest growing economies.
SCIN will track the INDXX India Small Cap Index, a free-float adjusted market capitalization-weighted benchmark comprised of 75 stocks with market capitalizations between $100 million and $2 billion. The top holdings of SCIN don’t include mega cap stocks such as Reliance Industries (OTC:RELFF) and Infosys (INFY) found in most other India ETFs; Patni Computer Systems (PTI) (3.4%), Indian Bank (2.5%), and Mangalore Refinery (2.0%) are among the largest individual components.
As investors have shifted their focus towards the emerging markets of the world, it has been China that has seized much of the attention. But India presents its own compelling growth story as one of the world’s fastest-growing markets. From a population standpoint, the numbers are staggering. India is one of both the largest and youngest nations in the world; the nearly 1.2 billion citizens have an average age of just 25 years, significantly less than the US, Europe, or Japan. The McKinsey Global Institute projects that India’s middle class will grow more than ten-fold by 2025, increasing from its current size of 50 million to nearly 600 million. The consumer market is projected to grow significantly over the next two decades as well, as an increase in wealth translates into a surge in discretionary spending.
The growth story in India is tied to an expected surge in the middle class. As the percentage of the country’s population with both the means and interest to spend on consumer good surges, the economy is expected to undergo a gradual but dramatic transformation.
Small Cap Difference
Currently, the largest ETP offering exposure to Indian equities is the iPath MSCI India Index ETN (INP), an exchange-traded note linked to the MSCI India Total Return Index. That benchmark consists almost exclusively of giant and large cap stocks, including big weightings to energy giant Reliance (13%) and IT services firm Infosys (10%). The index underlying SCIN, on the other hand, has a median market capitalization of only about $500 million.
Investors have embraced international small cap ETFs as a means of establishing exposure to local economies around the world. ETFs tilted towards mega cap companies tend to be impacted more significantly by global macroeconomic trends; because these companies derive revenues from around the world, their profitability often depends as much on demand for exports from Europe and levels of consumer spending in the US as it does on the strength of the local market. Small caps, on the other hand, generally depend more heavily on domestic consumption, strengthening their correlation with local economic growth.
SCIN is the third country-specific ETF from EGA, joining the China Infrastructure Index Fund (CHXX) and Brazil Infrastructure Index Fund (BRXX). The company also offers a suite of “pure play” diversified emerging markets products
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