EGS INDXX India Small Cap ETF (NYSEARCA:SCIN) was listed for trading on the NYSE effective July 7. The new fund from Emerging Global Shares is based on the Indxx India Small Cap Index, a free-float market capitalization weighted stock index comprised of 75 Indian companies that Indxx thinks is representative of small-cap companies domiciled in India.
The SCIN overview page has background information on the new ETF, including its 0.85% expense ratio. This is the first ETF to target the small cap stocks of India. Existing products targeting large cap stocks include iPath MSCI Index ETN (NYSEARCA:INP), WisdomTree India Earnings (NYSEARCA:EPI), PowerShares India (NYSEARCA:PIN), and iShares India Nifty 50 Index Fund (NASDAQ:INDY).
The SCIN fact sheet (pdf) indicates 75 holdings with the largest being Patni Computer Systems Ltd 3.4%, Indian Bank 2.5%, Mangalore Refinery 2.0%, UCO Bank 2.0%, and Godrej Industries Limited 1.9%. The initial industry weighting has Commercial Banks at 12.6%, IT Services 8.7%, Software 7.8%, Textiles, Apparel & Luxury Goods 6.2%, Metals & Mining 6.0%, Real Estate Mgmt & Development 5.9%, Food Products 5.5%, Chemicals 4.7%, Media 4.6%, and Construction & Engineering 3.3%.
On the surface, this fund appears to be vastly different from the “large cap” focus of existing India ETFs and ETNs. However, analysis of the Index fact sheet (pdf) indicates that correlation to the Nifty Index is extremely high at 0.98 for the one and two-year periods and 0.97 for the three-year period.
I would expect the small cap stocks of India to have lower correlations to large cap stocks, which is what provides the desired diversification. However, the recent past has shown this not to be true. One reason may be the inability of foreign investors to gain easy access to the small cap segment, and small caps just got pulled along by the large caps. With SCIN now solving the access problem, perhaps we will begin to see variations in supply and demand along the capitalization curve, providing lower correlations in the future.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.