Small-Cap ETFs To Play India's Post-Election Growth Opportunity

Includes: SCIF, SCIN, SMIN
by: Tom Lydon


New ruling party in India is business friendly and will support the economy.

Small-cap Indian stocks will benefit the most from the recent election victory.

ETF options to track India's small-cap category.

With India's new Prime Minister-elect Narendra Modi moving into office, Indian stocks are surging. Investors can best capture the growth opportunities the new administration is promising through small-cap exchange traded funds. S Naren, CIO, ICICI Prudential AMC, said in an Economic Times article:

There is a huge scope for the economy to improve. So, all the economy-sensitive equity markets - whether it is small cap, midcap, infrastructure or banking - will see huge upsides as the economy picks up over the next three years.

Naren argued that the current situation in India could mirror the 2004 environment where small-caps and mid-caps could outperform the large-cap markets.

In a recent study, Ambit Capital has also found that the best stock returns come in the first two years following a new regime in India. R Sreesankar, head (institutional equities), Prabhudas Lilladher, said in a Business Standard article:

After any election, if the sentiment turns out to be good, the small-and mid-caps tend to outperform large-caps in the near-to-medium term. We believe that the same pattern will be followed this time, too.

Modi's new government is seen as very business friendly. The government could implement important reforms in areas like agriculture, banking and industrials.

ETF investors interested in targeting the small-capitalization category of India's market can take a look at a couple of options, including the Market Vectors India Small-Cap Index ETF (NYSEARCA:SCIF), EGShares India Small Cap ETF (NYSEARCA:SCIN) or iShares MSCI India Small-Cap ETF (BATS:SMIN).

SCIF includes a 52.5% weight in mid-caps, 43.8% in small-caps and 3.7% in micro-caps. Top sector allocations include consumer discretionary 23.7%, financials 23.6% and industrials 18.3%. The ETF has a 0.93% expense ratio and is up 31.2% year-to-date.

SCIN leans toward larger companies, with mid-cap names accounting for 76.0% of the portfolio, followed by large-caps 14.8% and small-caps 9.2%. The fund also tilts toward financials stocks at 34.9% of the portfolio, followed by consumer discretionary 17.1% and industrials 13.6%. The ETF has a 0.85% expense ratio and is up 31.2% year-to-date.

SMIN's allocations does not have as much large names as SCIN but does not include as much smaller names as SCIF, with mid-caps at 74.5% of the iShares ETF's portfolio, followed by small-caps 19.9% and large-caps 5.5%. The fund has a 0.74% expense ratio and is up 23.8% year-to-date.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.