Emerging markets had a rough start this year. Feeble demand,
infrastructure bottlenecks, lower commodity prices, and falling
currencies sent markets tumbling around the world.
Further, the chances of the Fed’s QE3 tapering later this year
is compelling investors to pull out capital from higher risk
markets across the globe. This is because investors are
apprehensive of added troubles in the emerging nations from more
dollar appreciation and interest rate hikes once the stimulus is
curbed (read: Emerging Market ETFs Tumble on Global Worries).
Among the emerging economies, India has been a weak performer as
the country is grappling with both internal and external economic
threats. Plagued with slowing economic growth, persistent sky-high
inflation, low per-capita income and massive corruption, the
country is now feeling the brunt of a weakening currency as
well.
Behind the Tumbling Rupee
A high current account deficit and the pullout of capital from
emerging markets have put pressure on the Indian rupee. The
currency hit an all-time low of $61.51 on Tuesday against the
greenback, breaching the all-time low of $61.21 seen on Jul 8. The
rupee has tumbled more than 12.5% so far this year.
Further, the dovish tone by Reserve Bank of India (RBI) last
week resulted in further decline in the currency. The recent
liquidity tightening measures have also failed to bolster the
Indian currency.
While India isn’t exactly an export powerhouse, a weak currency
is making imports more expensive. High levels of oil import is
resulting in continued trade deficits and in turn intensifying
inflation.
Given wide trade deficits and a sharp fall in rupee, Indian ETFs
have been struggling this year, plunging double digits
year-to-date. In fact, India ETFs were hit hard last week (ending
Aug 2) and was the worst performer of all the emerging funds (read:
A Weaker Rupee--Boon or Bane for India ETFs?).
While this is true for all cap securities, small caps were more
beaten down than their large cap counterparts. Below, we take a
three Indian ETFs that track the Indian market.
All of these funds offer access to pint sized securities in the
nation and while they will likely see more volatility, they could
see better returns if the Indian economy trends in the right
direction (see more in the Zacks ETF Center).
EGShares Indxx India Small Cap Fund (SCIN)
This fund tracks the Indxx India Small Cap Index, and is
relatively unpopular, while it has an expense ratio of 0.85%. With
a holding of 76 securities, the product is heavy on financials with
more than 27% share, while consumer goods, industrials and
healthcare also get double-digit allocations in the basket.
Apollo Hospitals, Mahindra & Mahindra and Aditya Birla Nuvo
are the top three elements in the basket with a combined 13.7% of
assets, suggesting decent exposure in terms of individual
holdings.
The fund lost nearly 10% in the past week alone and over 36.6%
in the year-to-date period. However, the ETF is trading at deep
values as the PE ratio is below 10.0 while the P/B is below
0.9.
This indicates a nice entry point while the long-term outlook is
also positive. SCIN has a Zacks ETF Rank of #2 or ‘Buy’ rating,
suggesting that it is expected to outperform its rivals over the
one-year period (read: Two India ETFs Leading Emerging Markets
Higher).
Market Vectors India Small-Cap Fund (SCIF)
This fund tracks the Market Vectors India Small-Cap Index,
holding 97 securities in its basket. It has amassed $78.1 million
in its asset base and charges a high fee of 91 bps a year from
investors.
Though the product has a slight tilt towards the top firm - Niko
Resources – at 5.29% of SCIF, it is pretty spread across other
securities. None of the securities hold more than 3.5% share.
From a sector look, financials and consumer discretionary take
the top two spots with 21% share each while information technology
and industrials make up for the next two spots with 16.4% each.
The ETF has had a terrible year so far, delivering a negative
return of 9.19% last week and 42.85% year-to-date. However, the
fund is still trading at extremely low valuations as indicated by
P/E and P/B ratio of 8.44 and 0.74, respectively. SCIF currently
has a Zacks ETF Rank of #3 or ‘Hold’ rating.
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 and holds 145 securities in its basket. The ETF has
accumulated $2.6 million in total assets since inception and
charges 74 bps in fees per year.
The product is well diversified across individuals with the top
three holdings – Mahindra & Mahindra, Federal Bank and Tata
Global Beverages – making up for a combined 11% share. Here again,
financials is the top sector with 25.36%, followed by consumer
discretionary (17.22%), industrials (14.73%) and materials (11.91%)
(read: 3 Top Ranked Financial ETFs to Buy Now).
The fund lost 8.26% last week and is down 33.58% year-to-date.
The ETF currently has a Zacks ETF Rank of # 3 or ‘Hold’
rating.
Bottom Line
Despite several constraints, growth in India is still among the
highest in the world. Positive factors like a rising middle class,
a younger population and growing spending power would result in
soaring domestic consumption and in turn fuel economic growth.
This suggests that the India ETF outlook—at least over the long
term—isn’t as poor as one might think. However, volatility in the
near term could be high so pay close attention to any further moves
in this rocky market.
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WISDMTR-IND RUP (ICN): ETF Research Reports
IPATH-MS INDIA (INP): ETF Research Reports
PWRSH-INDIA POR (PIN): ETF Research Reports
MKT VEC-INDI SC (SCIF): ETF Research Reports
EMERG-GS INDIA (SCIN): ETF Research Reports
ISHARS-M IND SC (SMIN): ETF Research Reports
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Invesco India ETF (AMEX:PIN)
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Invesco India ETF (AMEX:PIN)
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