More Bad News For India ETFs

A day after plunging on news of a new budget that contains surprise spending increases, India ETFs are contending with more glum headlines on Friday. This time it has to do with the country's already

. Earlier today, Fitch Ratings said it will more than likely downgrade Asia's third-largest economy to junk status. "The reality is it [credit rating] is on negative outlook - so that bias suggests it's more than likely we will downgrade - that says it all," said Art Woo, director, sovereign ratings at Fitch Ratings,

. Fitch already has India on negative outlook. Standard & Poor's issued the same outlook on India

, warning at the time that India had a one-in-three chance of losing its BBB- rating. Predictably, potential lose of the investment-grade is not good news for India ETFs. The WisdomTree India Earnings ETF

and the PowerShares India Portfolio

are down by 0.5 and 0.4 percent today, respectively. The iShares S&P India Nifty 50 Index Fund

is trading modestly higher despite the Fitch news, though that should not be viewed as a positive sign.. In the past five trading days, INDY is off 3.82 percent. EPI has lost 4.83 percent while PIN has tumbled 4.53 percent. Fitch, like S&P, rates India BBB- with a negative outlook, giving the country the worst sovereign debt rating among the four BRIC nations. On the S&P ratings scale, BBB- with a negative outlook means India shares company with such fiscally challenged nations as Spain. The negative outlook for India also means S&P has a more favorable of the BBB- ratings held by Azerbaijan and Colombia, just to name a pair. Hurting India and the aforementioned ETF's is Finance Minister P Chidambaram's new budget, which calls for a

. Oddly enough, India holds elections next year and Chidambaram is widely believed to be a leading candidate for prime minister. Beyond the fact that India has been an emerging markets laggard in 2013, a year that is already proving tough for the broader universe of developing markets ETFs, is the notion that markets clearly do not favor Chidambaram's plan to boost spending. That assertion is affirmed by the ongoing tumble of India's small-caps. For example, the Market Vectors India Small-Cap ETF

devotes a combine 31 percent of its weight to industrial and materials stocks, two sectors that theoretically should benefit from government largess. Just this week, SCIF has plunged 8.2 percent. The rival EGShares India Small-Cap ETF

, which is highly exposed to industrial and consumer goods names, looks good only by comparison to SCIF. SCIN is down almost 6.3 percent this week. To be fair, S&P did say India's budget will not impact its rating on the country. The other side of that coin is that sovereign downgrades by ratings agencies are a lot like celebrity deaths. When one happens, another one or two often quickly follow. With the specter of a downgrade hanging India, investors can wait for better pricing with any of the ETFs highlighted here. For more on India, click

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