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India Small Cap ETFs Head-To-Head

Eric Dutram

Across the board, 2011 was a very rough time for emerging markets around the world. Political crises, inflationary concerns and worries over exports sent a variety of markets tumbling. While India isn’t exactly an export powerhouse, the country is a huge market as the nation has over 1.2 billion people and an economy of almost $4.4 trillion (PPP). Obviously, with such a high population and a relatively low GDP, the average per capita income in the country is still pretty low, even taking into account the solid economic performance of India over the past decade or so. As a result, the nation has been thoroughly rocked by high inflation sending many securities spiraling downwards and levels of discontent screaming higher across the country (read India ETFs: Behind The Crash).

In fact, India has been on a campaign of more than a dozen interest rates hikes in the past two year period in an attempt to curtail inflation across the region. The rate increases have had some effect has they have managed to push inflation rates down from near 10% levels to the current mark around 7.5%. However, they have also hurt growth and ravaged the country’s stock market, pushing the main benchmark of India, the SENSEX, down from just under 21,000 to a low just above 15,000 to end 2011.

Despite this situation, some are beginning to hope that India has finally gotten out of this malaise and that the economy can resume its solid levels of growth in 2012. This is evidenced by recent readings on the inflation front which are trending towards two year lows as well as more stable commodity prices to start the year.  Additionally, since India is more focused on consumers and services, the country could skirt by even if developed markets slump, much unlike many of its peers in East and Southeast Asia (see Five ETFs to Buy in 2012).  

Thanks to these potentially improving trends, investors could take a look at some Indian ETFs for investment, as they still could represent a decent long-term pick at these levels. However, it should be noted that many products targeting the region have already surged by double digits to the start the year although they are still depressed when looking at 52 week periods. While this is true for all levels of Indian securities, small caps have been even more beaten down then their large cap counterparts and could continue to surge higher in the months ahead, beating out their larger brethren on the upside(read Go Local With Emerging Market Bond ETFs).

As a result of this, investors should take a closer look at the three ETFs which track the Indian small cap market. All of these securities offer access to pint sized securities in the nation and while they will likely see more volatility, they could see better returns as well should the Indian economy continue to trend in the right direction. While any of the funds are quality picks for those looking for exposure to the space, there are a few key details that need to be taken into consideration before making a final choice:  

EGShares Indxx India Small Cap Fund (SCIN)

This fund tracks the Indxx India Small Cap Index which is a free-float market cap weighted benchmark that looks to be representative of the small cap market in India. The product currently includes about 73 holdings while charging investors 85 basis points a year in fees. Consumer goods takes the top spot at just over 26.3% of total assets while financials (22.3%), and industrials (17.4%), round out the top three. Performance in 2011 saw the fund tumble by nearly 55% in the time period although it has gained a great deal of this back in the first two months of this year. Still, the product is trading at deep values as the PE ratio is below 8.0 while the Price/Book is below 1.0 (read Five Cheaper ETFs You Probably Overlooked).

Market Vectors India Small-Cap Fund (SCIF)

For another way to play the small cap space, investors have SCIF from Van Eck. The fund tracks a benchmark of about 113 companies while also charging investors 85 basis points a year in fees. Much like its counterpart, consumer firms take the top spot at just over one-fourth of the total while industrials and financials comprise the rest of the top three spots at 18.5% and 17.3%, respectively.

This factor along with the total number of holdings, suggests that SCIF is less concentrated than it peers while also putting less into financials. Much like the fund’s EG Shares counterpart, SCIF saw a horrendous 2011, collapsing by nearly 47.4% in the process. However, it too is still trading at extremely low valuations—similar to SCIN—and it has begun to surge to start 2012, adding close to 50% in the time period (read Three Overlooked Emerging Market ETFs).

iShares MSCI India Small Cap Index Fund (SMIN)

The newest entrant in the India space comes from ETF giant iShares and its SMIN. The fund tracks the MSCI India Small Cap Index which holds about 90 securities in its basket while charging investors a relatively low 74 basis points a year in fees. Currently, its sector exposure is tilted towards financials (22%), consumer cyclical (18%) firms, and industrials (14%), while basic materials (13%) and health care (8%) round out the top five.

Investors should also note that individual financial firms comprise three of the top four spots in total, further demonstrating the focus on banking securities. In terms of performance, it is impossible to compare SMIN to its counterparts, as the fund debuted in early February. This means that the ETF missed out on much of the run-up so far this year but that it also avoided the terrible stretch of performance which was inherent to the space in much of 2011.










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Performance (Q4 2011)




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