3 Promising India Focused ETFs

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Includes: INCO, INXX, SCIF
by: Disruptive Investor

Summary

India will overtake China's GDP growth rate in 201 according to IMF and I believe that Indian equities are positioned for a multi-year bull market.

Infrastructure is India's biggest challenge as well as the biggest opportunity and I believe that the sector will perform well amidst lower interest rates in the foreseeable future.

India's consumption story has just commenced and with very favorable demographics, India's consumption is likely to grow at a robust pace making the consumer related ETF attractive.

While the focus has been on large companies in the recent rally in Indian markets, the small companies hold immense long-term potential and the small-cap ETF looks attractive.

India is poised to overtake China's GDP growth in 2016 according to the IMF and I have been bullish on India since the new government came to power in 2014.

Recently, I wrote an article on IMFs GDP outlook for 2015 and 2016 where I opined that India and the US are the bright spots in the global economy and I also opined that India is likely to be the best performing equity market in 2015. I had also provided two stock picks and one ETF for exposure to Indian markets.

In this article, I will be discussing three more ETFs that look very interesting considering a 2-3 year time horizon. I believe that these ETFs can serve as catalyst for the portfolio and investors need to diversify to India in order to boost overall portfolio returns.

EG Shares India Infrastructure ETF (NYSEARCA:INXX)

The India Infrastructure ETF is designed to measure the market performance of companies in the infrastructure industry in India. For 2014, the ETF provided returns of 20% and I believe that the ETF will provide returns in excess of 20% in 2015.

The reasons are as follows -

The Indian central bank cut interest rates by 25 basis points recently and another 75-100 basis points interest rate cut is likely. Lower interest rates will trigger upside for the interest rate sensitive infrastructure sector.

As the chart below shows, India needs infrastructure investment of nearly $1.25 trillion over the next 10-years and as the pace of investment grows under the new government, infrastructure companies are likely to outperform.

The ETF has high exposure to large and very large infrastructure companies in India and therefore the exposure is with companies having strong fundamentals.

The trailing PE ratio of the ETF holdings is 17.9, which is lower than the broader NIFTY PE of 22.2. Therefore, on a relative basis, the sector is still undervalued and has upside potential.

For these strong reasons, the EG Shares India Infrastructure ETF is an interesting ETF to consider not only for 2015, but with a long-term investment horizon.

EGShares India Consumer ETF (NYSEARCA:INCO)

As the name suggests, the India Consumer ETF is focused on the consumption theme. For 2014, the ETF provided an extraordinary return of 48%. While the same performance might not be replicated in 2015, the fund still looks very promising for strong returns over the next 3-5 years and a return of 15% to 20% in 2015 on a conservative basis.

The Indian consumption theme has just commenced and Amazon (NASDAQ:AMZN) clocking gross sales of $1 billion in the first year of operation in India is an indication of the potential the broad consumption theme holds in India. The PwC report is also upbeat on the media and entertainment sector in India for the next 5 years.

Further, India is set to become the youngest country in the world by 2020 and the favourable demographics mean that India has huge potential when it come to consumption themes such as personal goods, automobiles, media and entertainment.

The India Consumer ETF provides exposure to all these sectors of the economy with exposure to all the big players in the respective industries. I therefore expect the ETF to provide stellar returns considering a time horizon of 3-5 years.

India Small-Cap Index ETF (NYSEARCA:SCIF)

I believe that the Indian Small-Cap Index ETF, which has provided returns of 43% in the last one year, is another excellent ETF to consider for 2015 as well as for the next 3-5 years.

The above mentioned ETFs would give investors exposure to large or very large companies in India in the respective sectors. However, there is immense potential in some of the small or mid-sized companies in India. The growth for these companies can be robust if overall economic growth and sector growth is strong.

With the ETF currently having 30.1% exposure to the financial sector, 21.1% exposure to the consumer discretionary sector and 17.6% exposure to the industrials sector, the outlook for the ETF will certainly be robust in 2015. In particular, the financial sector will surge on low inflation and rate cuts and both these factors will also impact the consumer discretionary and industrials sector.

As of December 2014, the ETF had a very low PE of 11.24 and I believe that the ETF has strong upside in the coming quarters. In general, the broad market rally is led by large-caps followed by mid-caps and small-caps. Therefore, I expect the ETF to start moving significantly higher based on current valuations.

Conclusion

India is certainly one of the most attractive markets for 2015 and I believe that the Indian economy is on a path to sustained and robust growth in the next 5-10 years.

Therefore, investors need to have Indian stocks in their portfolio and the ETFs discussed have the potential of providing 15% to 30% annual returns if the government keeps its promise on drastic policy changes in the coming months.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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