What's Driving Investors Away From India ETFs?

India’s economy registered strong growth in the December quarter of 2017. However, recent times have been turbulent for the market, as various concerns at the global level have been weighing on investor sentiments across the globe. This in turn has been driving investors out of the country’s capital market.

Into the Headlines

The Central Statistical Office (CSO) reported that India’s economy grew 7.2% in the December quarter of 2017 compared with an upwardly revised 6.5% expansion in the previous quarter. However, despite the positive economic fundamentals of the Indian economy, a multitude of factors are shunning foreign institutional investors away from investing in the emerging market nation.

Net withdrawal by foreign portfolio investors (FPIs) from the equity markets came in at INR24.10 billion ($370 million) during March 1-9, while the same from the debt markets was INR34.73 billion ($530 million), bringing the total outflow from the Indian capital market to almost INR59.00 billion ($910 million). This compared with a total net outflow of INR110 billion ($1.69 billion) in the previous month.

What’s Making FIIs Reallocate Their Portfolios?

In a shock to investors, India’s Finance Minister announced the return of the long-term capital gains tax in the most recent budget. Equity investments sold after a year will be subject to a 10% charge on profits, dealing a blow to investors in early February (read: India ETFs in Focus on Union Budget Release).

Moving on, the S&P 500 entered correction territory in February, as it declined more than 10% from the record high scaled in January. Strong wage growth and jobs data induced fears of inflation, leading investors to bet on aggressive rate hikes. As a result, market volatility increased and investor risk aversion led them to steer clear from highly volatile investments like emerging market equities.

At times of high global volatility, investors tend to stay put in investments with minimal volatility, and minimize their allocations to investments that are highly impacted by global risks.

Adding to the agony, recent events at the domestic space have not been very convincing for investors following the Indian market. The public sector banking space has faced the recent brunt, as diamond billionaire Nirav Modi was accused of perpetrating a fraud to the tune of more than $2 billion along with some members of the state-run Punjab National Bank (read: Will Latest Bank Fraud Impact India ETFs?).

The issue in discussion is that if investors are not confident about the government’s operations and if the inherent risks of emerging market investments actually come true, foreign investors will think twice before taking on the risks that come with such investments.

Let us now discuss a few ETFs focused on providing exposure to the emerging market nation (see all Asia-Pacific Emerging ETFs here).

iShares MSCI India ETF INDA

This fund provides exposure to large and mid-sized Indian equities.

It has AUM of $5.2 billion and charges a fee of 68 basis points a year. Financials, Information Technology and Energy are the top three sectors of the fund, with 23.3%, 15.8% and 13.4% allocation, respectively (as of Mar 9, 2018). Housing Development Finance Co, Reliance Industries Ltd and Infosys Ltd are the top three holdings of the fund, with 9.4%, 8.8% and 6.9% allocation, respectively (as of Mar 9, 2018). The fund has returned 16.8% in a year.

WisdomTree India Earnings Fund (V:EPI)

This fund provides exposure to Indian equities in multiple capitalization segments.

It has AUM of $1.7 billion and charges a fee of 84 basis points a year. Financials, Information Technology and Energy are the top three sectors of the fund, with 22.7%, 19.0% and 18.9% allocation, respectively (as of Mar 9, 2018). Reliance Industries Ltd, Infosys Ltd and Housing Development Finance Co are the top three holdings of the fund, with 9.2%, 8.6% and 6.4% allocation, respectively (as of Mar 9, 2018). The fund has returned 18.7% in a year.

iShares India 50 ETF (JK:INDY)

This fund provides exposure to large-cap Indian equities.

It has AUM of $1.2 billion and charges a fee of 93 basis points a year. Financials, Information Technology and Energy are the top three sectors of the fund, with 35.3%, 12.8% and 12.8% allocation, respectively (as of Mar 9, 2018). Reliance Industries Ltd, Housing Development Finance Co and Infosys Ltd are the top three holdings of the fund, with 8.0%, 7.3% and 5.9% allocation, respectively (as of Mar 9, 2018). The fund has returned 17.4% in a year.

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