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An ETF (INDF) to Play India's Financial Sector

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Recently, a new India-focused ETF, namely Nifty India Financials ETF INDF, was launched. The launch of the ETF is well timed as India has been steadily climbing the ladder to make its place alongside the top global economies. In 2020, it is the seventh biggest economy in terms of nominal GDP and may reach the third-largest spot by 2030.

India’s economy may see slow recovery in fiscal 2021-22 as the peak of the coronavirus crisis appears to be subsiding. India is likely to rebound with an impressive 8.8% growth rate in 2021, per IMF. Since the financial sector is the backbone of any economy, such potential uptick in economic growth makes it important to take a look at India’s financial sector.

Inside INDF

The fund tracks the Nifty Financial Services 25/50 Index, which reflects the performance of India’s banks, financial institutions, housing finance companies, insurance companies and other financial services companies. HDFC Bank Ltd. (19.39%), Housing Development Finance Corporation Ltd. (16.52%), ICICI Bank Ltd. (12.87%), Axis Bank Ltd. (4.79%) and Kotak Mahindra Bank Ltd. (4.53%) are the top five holdings of the fund. In total, the fund holds 20 stocks. It charges 75 bps in fees.

How Does It Fit in a Portfolio?

Per the investment case provided by the issuer, India’s private-sector financials are actually the FANGs of India. Stocks of India’s private sector financial companies like "HDFC Bank, ICICI Bank, Bajaj Finserv and Kotak Mahindra have been the steady compounders of shareholder value through top-line growth and wise capital allocation". These have gained market share on a continuous basis and had a "defensible “moat” against new competition".

The investment case went on to point out that total credit of private sector financial companies has grown about twice the rate of GDP growth. Notably, the assets and earnings of the largest private sector bank – HDFC Bank – has witnessed a high-teens compounded annual growth rate over the last five years.

The issuer’s investment case indicated that the price-to-earnings multiples of the banks are at the lower end of the historical range after the COVID selloffs. This indicates room for a surge ahead. In terms of credit quality, private banks outperformed state-run banks with relatively lower non-performing assets.

India’s Covid-focused stimulus is also likely to act as a tailwind for banks in the medium term as the Reserve Bank of India cut rates sharply and prompted banks to lend. RBI has slashed the repo rate by 115 bps in 2020 on top of 135 bps of rate reductions in 2019. This factor should benefit the loan growth of a country that is a key emerging economy and is in a decent growth stage.

ETFs in Focus

The pure-play exposure to India’s financial system has happened for the first time with INDF. Otherwise, India has several ETFs namely, WisdomTree India Earnings Fund (EPI - Free Report) , First Trust India NIFTY 50 Equal Weight ETF (NFTY - Free Report) , iShares India 50 ETF (INDY - Free Report) , Invesco India ETF (PIN) and WisdomTree India ex-State-Owned Enterprises Fund (IXSE - Free Report) .

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