A Fundamental Case For India ETFs

As has been widely documented, India is one of the best-performing emerging markets this year. U.S.-listed India exchange-traded funds reflect as much. For example, the WisdomTree India Earnings Fund EPI, one of the largest India ETFs trading in New York, is up almost 21 percent year-to-date while the MSCI Emerging Markets Index is higher by just over 12 percent.

Introducing EPI

Often one of the largest sector allocations in a plethora of diversified and single-country emerging markets ETFs, financial services names play a pivotal role in determining the fortunes of these funds. That could prove to be good news for EPI. Non-performing assets have been an issue for Indian banks, one that is being worked through now.

EPI's underlying index holds the most profitable Indian companies that are accessible to foreign investors. Profitability is the key there at a time when emerging markets earnings growth is, at best, anemic. EPI devotes nearly a quarter of its weight to financial services stocks.

“Over the last year and a half, more than 270 million newer bank accounts have been opened with more than 665 billion rupees coming into formal banking,” said WisdomTree in a recent note. “If this weren’t enough, all these accounts are linked to the biometric information, increasing efficiency in processes ranging from tax audits to transfer of welfare money and the elimination of middlemen.”

EPI may appear expensive relative to the MSCI Emerging Markets Index, but Indian stocks currently trade at multiples that are in line with historical averages.

Cost, Valuation

Valuation likely is not investors' primary concern with Indian stocks. Familiar issues such as high inflation and slow-moving government reforms are the considerations for foreign investors when mulling stakes in Indian stocks or ETFs.

“Usually the perception of India has been that of a country with significant potential but a very unorganized and messy system,” said WisdomTree. “As India networks its $2.4 trillion economy, it’s more than a trillion dollars of annual retail purchases, 1.2 billion people and 430 million Internet users, we are witnessing a new era in the way it conducts business. This is going to remain one of the great investment opportunities of the next decade.”

Tactical exposure to India with ETFs such as EPI makes sense for investors looking to participate in the country's surging equity markets because despite its economic heft, India's footprint in some diversified emerging markets ETFs is relatively light. For example, the MSCI Emerging Markets Index allocates just 8.7 percent of its weight to India.

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