The much-anticipated win of Narendra Modi‘s Bharatiya Janata Party (:BJP) took Indian stock markets to the new heights on May 16 making the country’s ETFs huge beneficiaries of the election results.
As such, ETFs on India have been on fire since the start of this year on hopes of an end to the Congress-led regime and its dysfunctional policies as well as the selection of a pro-growth politician Narendra Modi as India’s next prime minister.
BJP’s comprehensive win led India’s Bombay Stock Exchange (BSE Sensex) to cross the 25,000 mark on May 16. Most analysts are optimistic on the start of India’s new era. This was more so as BJP won enough seats to form the government as a single party without any alliance. India has seen a majority government for the first time since 1984.
Though India is currently plagued with several structural issues like heightened inflation, devaluation of currency and slowing growth, major investment banking firms appear bullish on the nation’s stock market. Recently, Deutsche Bank lifted the December 2014 Sensex goal to 28,000.
Macquarie and UBS also have increased their targets for the Nifty to reflect BJP’s win. While UBS now forecasts 8,000 points for Nifty against 6,900 for 2014, Macquarie lifted the 12-month Indian index target to 8,400 points from 7,200 (read: India ETFs in Focus on Goldman's Upgrade).
While there are several options in the space to ride out the optimism in the Indian market, we have highlighted three Indian ETFs that have witnessed astounding gains this year and could be better picks for investors.
These products hail from smaller capitalization and infrastructure segments. Notably, one can take the best glimpse of a domestic economy through a small cap stock. These stocks are less ruffled by the broader market gyrations, and most importantly, currency woes (read: Time to Focus on Small Cap ETFs?).
Though presently staying in stable territory, a decline in currency has been one of the India’s major issues in the recent past. Also, small-cap stocks perform better in a trending market.
On the other hand, Modi’s seemingly pro-growth and pro-privatization policies are expected to bolster sectors like infrastructure. The state of Gujarat – where Modi was Chief Minister for three terms – is known for registering marked improvement in power supply and road infrastructure.
EGShares Indxx India Small Cap Fund (SCIN)
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 stocks in its basket, the fund allocates higher to Yes Bank Ltd, Cummins India Ltd and Federal Bank Ltd with a combined 15% share. From a sector look, financials make up for one-third of the portfolio while consumer goods and industrials get double-digit allocation in the basket (read: Time for the India Small Cap ETF (SCIN)?).
The ETF is unpopular and illiquid with AUM of $17.8 million and average daily volume of about 17,000 shares. The fund charges 85 bps in fees per year and added nearly 14.4% post BJP’s victory and 39% this year. SCIN has a Zacks ETF Rank of 2 or ‘Buy’ rating.
India Small-Cap Index ETF (SCIF)
This ETF is also a small cap centric fund and follows the Market Vectors India Small-Cap Index. Madras Cements, Apollo Tyres and Jain Irrigation Systems occupy the top three positions in the basket with a combined 9% of assets.
With respect to sector holdings, consumer discretionary and financials take the top two spots at 23.7% and 23.6%, respectively, while industrials (18.3%) and IT (12%) round out the top four positions.
The ETF invests about $251.4 million in assets in 89 stocks and trades in volume of nearly 140,000 million shares a day, suggesting some extra cost in the form of a tight bid/ask spread beyond the expense ratio of 0.93%. SCIF is up about 11.8% post results and about 38% this year. SCIF has a Zacks ETF Rank of 3 or ‘Hold’ rating with a medium risk outlook.
EGShares India Infrastructure Index Fund (INXX)
This fund provides exposure to the growing infrastructure corner of the broad Indian market by tracking the Indxx India Infrastructure Index. Holding 31 stocks in its basket, the fund allocates higher to Bharat Heavy Electrical, Tata Steel and Larsen & Tubro with a combined 20% share. From an industry look, industrials take the top spot with 45%, closely followed by utilities (21%), basic materials (11.2%), and telecom (10.6%).
The fund has accumulated just $22.1 million in its asset base and trades in small volume of 30,000 shares a day on average. Expense ratio came in at 0.85%. Though INXX is unpopular, illiquid and expensive, the product has gained about 13.8% post-election results and 34% year to date. The ETF has a Zacks ETF Rank of 3 with a medium risk outlook.
While the market will likely remain strong in the coming months as the hoped-for drivers have fallen into place, corrections are quite likely in this bloated phase. Investors will definitely try to book profits sometimes in the coming days.
Thus, one needs to be hawk-eyed while remaining invested in India. Narendra Modi’s first budget – slated for presentation in the first week of July – will decide the fate or fortunes of the Indian market.
After that event, India ETFs will surely take a new turn – be it upward or downward. Till then, these afore-mentioned ETFs could be in focus and worth a closer look by investors (read: India ETFs: Can the Surge Continue after Elections?).
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Read the analyst report on SCIN
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Read the analyst report on INXX
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