India ETFs: Good For A Day, Better Days Ahead In 2012?

One day does not make a trend, but one day can, at the very least, start a new trend. That might be what beleaguered investors in India-specific ETFs are hoping for as a miserable 2011 for Indian equities draws to a close. Looking across the universe of emerging markets ETFs today, India-specific funds are outperforming other emerging markets fare, including their BRIC rivals. Again, it's just one day we're talking about. Year-to-date, the performance of four of the more widely known large-cap India-specific ETFs is nothing short of ugly. Try an average decline of about 32% for the WisdomTree India Earnings ETF

, iPath MSCI India Index ETN

, PowerShares India Portfolio

and the iShares S&P India Nifty 50 Index Fund

. Making the 2012 outlook for the aforementioned quartet even more murky is the fact that India's third-quarter GDP grew just 2.7%, the weakest pace

. The sour cherry on that sundae was Moody's Investors Service lowering its outlook on the entire Indian banking sector earlier this week to negative from stable. Bad news for EPI and INDY, which have weights to financial services stocks of over 22% and 25%, respectively. The PowerShares India Portfolio is problematic in its own right, at least at the moment. PIN's allocation to bank stocks is just 12%, but a 10.1% weight to India's contracting materials space is an issue to be aware of. And a 25.5% allocation to energy could be an issue should energy stocks fall out of favor in early 2012. In fairness, it should be noted that Standard & Poor's upgraded India's banks. Then again, we need to tell you Moody's is talking about a possible sovereign ratings downgrade. If that downgrade comes to pass, the technically vulnerable ETFs mentioned could find themselves careening into 2012. Levels to watch: Short INDY below $20, long above $24 and $26. Short EPI below $16, long above $19 and $22. Short PIN below $16, long above $21. Short INP below $49, long above $60 and $64. Bottom line: India ETFs may merit consideration as short-term trades at the moment, but it would be wise to wait for some of the dark clouds to pass before establishing long-term positions in these funds. Bull case: Not more bank downgrades and the sovereign downgrade does not happen. Further out, India contains inflation and investors warm to the notion that India is offering GDP growth that is still far superior to almost any developed market. Bear case: Inflation continues to plague India and investors pass on emerging markets fare. Use the Direxion Daily India Bear 3X Shares

if either of those situations happen.