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Rupee Slide Hits Small Cap India ETF

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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 - Free Report)

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 - Free Report)

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 - Free Report)

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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COL-INDIA SC (SCIN) - free report >>

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ISHARS-M IND SC (SMIN) - free report >>

PWRSH-INDIA POR (PIN) - free report >>

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