India ETFs: Best of the BRIC House…Again

It may not feel like it, but according to S&P Dow Jones Indices, emerging markets outperformed developed markets last month. Although just eight of 23 emerging markets traded higher, India’s heft helped those 23 markets post an average gain of 0.34%, better than the average loss of 1.7% for the 25 developed markets tracked by S&P.

Indian stocks surged nearly 8.3%, according to S&P data, starting 2015 in similar fashion to how they performed for much of 2014. That is a boon for exchange traded funds, such as the WisdomTree India Earnings Fund (NYSEArca: EPI), iShares MSCI India ET (BATS: INDA), PowerShares India Portfolio (NYSEArca: PIN) and the Market Vectors India Small-Cap Index ETF (NYSEArca: SCIF).

Last year, EPI and PIN gained an average of 24.1% while SCIF was one of the top-performing non-leveraged ETFs of any variety with a gain of 42.4%. On the other hand, the MSCI Emerging Markets Index fell nearly 4%. Importantly, India ETFs are following through on those gains to start 2015. EPI and PIN are both up more than 8% to start the year while SCIF is higher by nearly 10%. [The Dominance of India ETFs]

Those gains have Indian stocks looking somewhat richly valued, making it critical for investors to consider ETFs that are not excessively exposed to the priciest Indian names. EPI helps ameliorate the India valuation conundrum.

“One potential concern for investors when such large gains occur in a short period is that the market may become expensive. The majority of Indian indexes are market cap-weighted —meaning they tend to give more weight to companies that sell at higher prices than to those that offer stronger fundamentals. On the other hand, the methodology of EPI’s underlying Index, the WisdomTree India Earnings Index (WTIND), is designed to magnify the effect of earnings on weights and total returns. WisdomTree’s earnings-weighted approach for India helps keep focus on lower-priced segments of the Indian market, and the annual Index rebalance in September helps manage the valuation risk. Our research shows that, since its inception, the WTIND has traded at a 34% discount to the MSCI India Index; the discount is currently at 27%,” said WisdomTree in a recent research note.

Last year, Indian equities and the aforementioned ETFs were buoyed by the landslide victory for Hindu nationalist Narendra Modi in the country’s national elections. In 2015, other factors are supporting India ETFs, including low oil prices (India is a net importer of crude) and a surprise interest rate cut. That rate cut, which saw India’s benchmark repo rate drop to 7.75% from 8%, was made possible by ebbing inflation.