Will India ETFs Election Fever Continue?

Thanks to election fever, Indian markets are hitting fresh highs. The BSE Sensex breached the 22,000 threshold while the National Stock Exchange index – Nifty – is hovering close to 6,600.

The strong rally is mainly driven by consistent incredible foreign fund inflows on optimism over the new government to turnaround the beleaguered economy that outweighs the negative global sentiments stemming from the continued Fed taper, soft economic data in China and geopolitical tensions in Europe.

Notably, foreign investors have pumped in around 73,235 crore rupees ($2.6 billion) in the stock market so far this year, making it the fourth highest inflow after injecting 1.4 lakh crore rupees in 2013 and 1.1 lakh crore rupees in 2010 and 2011 each.

Further, overall fundamentals are improving for the Indian economy. Current account deficit is narrowing, fiscal deficit is under control, inflation has been trending down, and rupee has stabilized .

The Indian currency has shown strong resilience to the emerging market turmoil this year and has appreciated nearly 12% from the record low reached in late August. Rupee is currently hovering around 60.50 against the greenback, representing the highest level in eight months. Moreover, the geopolitical tensions in Russia, slowdown in China and turmoil in other emerging nations are boosting investor confidence and encouraging them to invest in the recovering Indian economy.  

The bullish trend in Indian market and its currency is likely to continue until the election results on the expectation of a strong growth-oriented government post elections and the domestic factors, which are stimulating growth in Asia’s third-largest economy.

Investors seeking to ride out this optimism could play with the Indian ETFs with a lower risk. While there are several options in the space, the following four ETFs are leading the space higher, gaining double-digits over the past one month. Any of these products could be an intriguing choice for investors at least for the near term:

EGShares Indxx India Small Cap Fund (SCIN.K)

This fund provides exposure to the small cap segment of the broad Indian equity market by tracking the Indxx India Small Cap Index. Holding 56 securities, the product is widely spread out across each security as none of these holds more than 3.3% of assets. From a sector look, financials make up for one-third of the portfolio while industrials and consumer discretionary get double-digit allocation in the basket.

The ETF is unpopular and illiquid with AUM of $15.6 million and average daily volume of about 14,000 shares. The fund charges 85 bps in fees per year and added nearly 10% in the past one month. SCIN has a Zacks ETF Rank of 2 or ‘Buy’ rating.

WisdomTree India Earnings Fund (EPI)

This product tracks the WisdomTree India Earnings Index and is tilted toward large cap stocks. In total, the fund holds 169 securities with the largest allocation going to Reliance Industries and Infosys that account for 8.67% and 7.21% share, respectively. The ETF is heavy on financials with one-fourth share, followed by energy (19.27%), information technology (14.76%) and industrials (10.43%).

EPI is the largest and most popular ETF targeting India with AUM of $884.3 million and average trading volume of more than 4.1 million shares. Expense ratio came in at 0.83%. The fund gained nearly 11% over the past month and has a decent Zacks ETF Rank of 3 or ‘Hold’ rating.

iShares India 50 ETF (INDY)

This ETF is also a large cap centric fund and follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. ITC, Infosys and Reliance Industries occupy the top three positions in the basket with a combined 23% of assets. With respect to sector holdings, banks and software take the top two spots at 20.8% and 15.7%, respectively, while others make up for single-digit allocations.

The ETF has amassed $477.6 million and trades in volume of nearly 160,000 million shares a day, suggesting some extra cost in the form of tight bid/ask spread beyond the expense ratio of 0.93%. INDY is up over 10.5% in the trailing one-month period and has a Zacks ETF Rank of 3 or ‘Hold’ rating.   

EGShares India Infrastructure Index Fund (INXX.K)

This fund provides exposure to the growing infrastructure corner of the broad Indian market by tracking the Indxx India Infrastructure Index. Holding 30 stocks in its basket, the fund allocates higher to Bharat Heavy Electrical, Larsen & Tubro and Tata Steel with a combined 20% share. From a sector look, industrials take the top spot with 38%, closely followed by utilities (26%), basic materials (17%) and telecom (11%).

The fund has accumulated just $16.6 million in its asset base and trades in small volume of 10,0000 shares a day on average. Expense ratio came in at 0.85%. Though INXX is unpopular, illiquid and expensive, it is leading the space higher gaining about 15% in the past one month. The ETF has a Zacks ETF Rank of 3 or ‘Hold’ rating.

Bottom Line

These products are clearly outpacing the broad U.S. market fund (SPDR S&P 500 (ARCA:SPY), emerging Asia Pacific fund (SPDR S&P Emerging Asia Pacific (GMF) and the broad emerging market fund (Vanguard FTSE Emerging Markets (ARCA:VWO) by wide margins. This outperformance will continue based on post-election boom and improving domestic fundamentals. Investors should not miss this opportunity of grabbing the surging sentiments with any of the above-mentioned products.

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