Take Note of the Energy Weighting in This New India ETF

It looks like WisdomTree (WSDT) is going to list its India ETF this Friday with ticker EPI. It is weighted by earnings not dividends.

Information on the index is posted here. The fund is weighted 25% to energy and 15% to materials with Reliance Industries having the largest, by far, weighting of 13.56%.

The more widely known names from India are Satyam (SAY), Wipro (WIT) and Infosys (INFY) yet "Software and Services" are only 11.51% of the index.

I'm not sure I would intuitively think India would be 40% resources, but I guess that's where the earnings chips fall.

India is a relatively complicated investment destination. A few clients own one of the closed end funds and have owned it for a while (but I did shave some off along the way). I have no real complaints with the fund, but have never loved it either.

When we were earlier in the stock market cycle, I was comfortable holding both China and India across the board, but not so later on in the cycle. I sold my Chinese stock last June (I believe) and, as I said, only some clients have India. If I had to choose between China and India for the long term (and to be clear my zero China is more of a short term tactical position than anything else) I would probably prefer China, but I do concede the bullish case for India is compelling.

Back to the ETF: If you are inclined to own it, I think you need to factor in the energy and materials weighting of the fund into the rest of what you own. Most country funds are heavy in something. A 5% weight in EPI adds 125 basis points to whatever else you have going on in energy.

This is a big thing with country funds. That a country fund is overweight something is neither a positive or a negative, it just is. So it is crucial to be cognizant of this issue and to take steps to make sure you end up with the sector weightings you want.

The problem seems generally more prevalent with the financial sector. Many different types of funds have more than 25% in financials. I've written about a lot of WisdomTree funds for TSCM and always include the same caveat about bad news for the financial sector being bad news for the fund.

So with EPI, among other things, weakness in energy stocks will probably hurt the fund, and I doubt a rebalance would bail the fund out, because energy prices could probably come down a fair bit and still keep the sector on top of the Indian earnings heap.

Comments

[haydete]

Could be a good thing. EWZ has 25% of not just energy, but just PBR. Then it has 23% of not just resources, but of RIO.

Three banks, two steel companies, and a beer company later and you have covered over 70% of EWZ.

Anyway, good comments. I hope this fund acts less mysteriously than INP did.

[granger]

Yeah, this fund should act better over the long run than any ETN.

Not sure what to think about ETN's. Many years from the credity quality of the ETN issuer could come back to bite you, just like what is happeing in the markets now.

[Athar]

India is no Brazil in energy and natural resources. The last paragraph of the article is bang on target.