India ETFs after Central Bank Rate Cut
India ETFs appear to be back on track after a year of sluggish growth when its performance fell behind other emerging market counterparts. Several government reforms and strong corporate earnings boosted the price of Indian equities which eventually resulted in the ETFs tracking the region to post strong gains (India ETFs: Getting Back On Track?).
The Indian economy is largely dependent on foreign capital inflow for growth and the government’s recent decision to allow foreign direct investment in Indian retail led to a strengthening of the economy.
Beyond this, the RBI, or the Reserve Bank of India, also played its part in infusing more liquidity in the economy through interest rate cuts. The bank has recently embarked on another rate cutting campaign, slashing the rate for the first time in a while (A Trio of Top Emerging Market ETFs for 2013).
The RBI slashed the policy repo rate by 25 basis points (bps) to 7.75% and also reduced the cash reserve ratio (CRR), the portion of deposits banks need to maintain with the central bank, by 25 bps to 4.00%. This will result in an infusion of further 180 billion rupees into the banking system.
The attempt by the bank is viewed as a measure to reinvigorate growth in an economy that is seeing the slowest growth rate in a decade. However, the bank also emphasized on the fact that further reduction in interest rates is unlikely attributable to high levels of fiscal and external deficits and inflation.
The central bank had last made a reduction of 50 bps in Apr 2012. Since then the central bank refused to make any cut in interest rates despite the government’s continuous appeal in the light of the high level of inflation.
This marks the second attempt by RBI to cut the CRR since the third quarter of fiscal year 2012. Bad loans in Indian banks have risen to a high level. In fact, the economy has recorded the highest level of ratio of bad debt at banks in the last five years (Does Your Portfolio Need An India ETF?).
Meanwhile the inflation rate was brought to a three-year low of 7.18% in December and the central bank expects inflation to remain range bound around this level while heading into the 2013/2014 fiscal year starting April.
However, a fall in the expectation of GDP growth rate disappointed the market as the RBI reduced its GDP growth forecast for Asia's third-largest economy to 5.5% for the current fiscal year, from 5.8% previously.
Indian banks make a healthy portion of ETFs tracking the economy and the infusion of more liquidity in Indian banks should positively impact the performance of these ETFs (Can India ETFs Continue Their Solid Run?).
In fact with the RBI’s announcement on rate cut, Indian ETFs jumped higher on Tuesday’s trading session. Below we are highlighting three ETFs tracking the Indian economy in which financials play a substantial role and which could see a continued boost should the current trends continue:
iShares S&P India Nifty 50 ETF (INDY)
Launched in November 2009, INDY is a Zacks top ranked ETF tracking Indian securities (Zacks Top Ranked India ETF in Focus: INDY). The product has amassed a net asset base of $419.6 million and trades at a volume level of more than 300,000 shares a day.
Banks are the first preference of the fund among sector allocation and make up a substantial portion of the basket with a share of 12.15%. Other than banks, only computers software gets a double-digit allocation in the fund with a share of 12.75%. Among others, the fund does not invest more than 8.54%.
The fund’s asset base is spread across 51 Indian securities and does little to reduce company specific risk as more than 55% of the asset base go towards the top ten.
ITC Limited (8.54%), Reliance Industries Limited (7.72%) and ICICI Bank Limited (7.19%) are the three top elements in the basket, with a combined share of 23.45%. The ETF is extremely pricey with an expense ratio of 92 basis points a year.
WisdomTree India Earnings Fund (EPI)
EPI is another Zacks top ranked ETF and manages an asset base of $1,298.9 million. It is also the most liquid ETF among the three trading at volume levels of more than 2.6 million shares a day (Zacks Top Ranked India ETF: EPI).
The fund offers a broader play in Indian equities as it holds a portfolio of 146 securities. The fund appears to be moderately diversified in the top 10 stocks where it has invested 42.18% of its assets.
From a sector perspective, the ETF relies heavily on its top sectors. Financials, energy, information technology, materials and industrials are the sectors with double-digit exposure. Healthcare, consumer staples and telecommunication services are sectors with least allocation, leaving a skew towards traditional sectors.
Among individual holdings, Reliance Industries, Oil and Natural Gas Corporation and Infosys form the top line of the fund and together account for almost 21.8% of the allocation. The fund charges an expense ratio of 83 basis points on an annual basis.
PowerShares India Portfolio (PIN)
PowerShares’ PIN tracks the Indus India Index, providing exposure to 50 Indian securities. The fund has built an asset base of $402.6 million since its inception and trades at a volume level of more than half a million shares a day.
These 50 securities are mainly from energy, financials and information technology sectors in which the fund assigns more than 60% of the asset base in total. Among individual holdings, Infosys (10.96%), Reliance Industries (10.13%) and Oil & Natural Gas Corp (8.57%) occupy the top line of the fund.
The fund appears to be a bit reasonable than INDY, charging a fee of 78 basis points from investors. It has returned 13.5% to investors on an annual basis.
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Read the analyst report on INDY
Read the analyst report on EPI
Read the analyst report on PIN
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Read the analyst report on INDY, EPI, PIN
