India ETFs Aren’t Done Yet

Exchange traded funds tracking Indian equities have been among the brightest spots in what has generally been a shiny year for emerging markets ETFs.

In the run-up to and in the aftermath Narendra Modi’s win in the recent national elections, India ETFs have cemented their status as emerging markets leaders. For the year, the the Market Vectors India Small-Cap Index ETF (NYSEArca: SCIF ) and the WisdomTree India Earnings Fund (NYSEArca: EPI ) are two of the 10 best non-leveraged ETFs. [Buying Opportunity in This India ETF]

Over the past six months, six India ETFs rank among the top-13 ETFs of any type. The political regime in Asia’s third-largest economy has also bolstered the country’s sovereign, sending Indian benchmark bonds higher by more than 5%, and the rupee. The WisdomTree Indian Rupee Strategy Fund (ICN) is up 8.2% this year.

Still, some analysts believe Modi must take steps to loosen India’s foreign direct investment restrictions to propel Indian equities higher.

“Having vowed to accelerate the real rate of growth in the domestic economy to eight percent, Modi remains open to the idea of lifting the limit on foreign direct investment (FDI) from 26 percent to as high as 100 percent depending on how much technology companies abroad are willing to transfer to India,” said S&P Capital IQ in a new research note.

Expectations for near-term relaxation of India’s FDI limits are muted with the possibility of the investment cap in the defense and insurance sectors being raised to 49%, according to S&P Capital IQ.

EPI, the largest India ETF by assets, allocates a combined 50.5% of its weight to financial services, technology and industrial stocks. Those are three of the four largest sector allocations in the ETF, which S&P Capital IQ rates marketweight. EPI is up nearly 36% year-to-date and has added $457.4 million in new assets, more than any other single-country BRIC ETF. [India ETFs Hauling in Cash]

One reason Indian equities soared following Modi’s victory was the belief among investors that the new regime would address India’s substantial infrastructure needs.

“Modi has also pledged to modernize the nation’s dilapidated railway network that requires an estimated $93 billion for fortifying bridges, modernizing existing track and upgrading signaling and communications. In addition to the aforesaid plans, Modi appears intent on expanding India’s waterways extensively to connect the key Ganges and Indus rivers with a series of canals and reservoirs for enriching agricultural yields and redirecting flood waters at a cost of roughly $168 billion over twenty-five years,” said S&P Capital IQ.

The EGShares India Infrastructure Index Fund (INXX) is also one of this year’s best ETFs of any type with a 43.5% gain, indicating that investors are pricing in infrastructure largess in some form.

Last week, the Reserve Bank of India exempted banks issuing infrastructure-related bonds from cumbersome reserve requirements that deterred issuance of such bonds. [India Infrastructure ETF Gets a Lift]