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India ETFs Surging: Can This Trend Continue?

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India seems to be back on track with the major indices at record highs after a slowdown in 2013. The BSE Sensex breached the 22,000 threshold while the National Stock Exchange index – Nifty – soared to a lifetime high of over 6,540. This is primarily thanks to strong buying from foreign investors, slew of positive data and a more stable rupee.

Among the so-called fragile five economies that were affected the most by Fed tapering and foreign investment outflows due to their large current account deficits, India has emerged as the strongest country after Indonesia this year (read: How Did Indonesia Avoid the Emerging Market ETF Slump?).

Upbeat Data Fuels Rally

According to the recent data from RBI, foreign direct investment was more than double at $6.1 billion in the third quarter of fiscal 2014. In fact, foreign investors made their biggest daily purchases since December 6, on Friday for 25.77 billion rupees ($420.73 million). This represents the 16th consecutive buying session for a total of about $1.4 billion.

India’s current account deficit narrowed to a four-year low of $4.2 billion (0.9% of GDP) in the third quarter of 2013–14 from $5.2 billion (or 1.2% of GDP) in the second quarter buoyed primarily by government curb on gold imports. India aims to restrict its current account deficit at $45 billion at the end of fiscal 2013–2014, well below the record high of $88 billion at the end of fiscal 2012–13.

After two quarters of deficit, the country’s balance of payments turned into surplus of $19.1 billion during the October–December quarter. Trade deficit fell to $33.2 billion from $58.4 billion in the year-ago quarter. Exports rose 7.5% while imports declined 14.8% (read: Is the Worst Over for These Emerging Market ETFs?).

Moreover, the foreign exchange reserves was $294.36 billion as of February end, up from $3.78 billion in the year-ago month. All these data have spread optimism and confidence into Asia’s third largest economy at least for the near term, bolstering the Indian rupee and prompting more foreign investments.  

The Indian currency has shown strong resilience to the emerging market turmoil this year and has appreciated nearly 12% from the record low reached in late August. Many experts expect rupee to continue its bull run ahead of the elections in early April.  

Given improving fundamentals and encouraging data, Indian ETFs have been spiking, gaining over 5% in the past five trading sessions. Below, we have highlighted three ETFs that have performed strongly in the recent rally and are poised to move higher given the optimism about the possible change in the Indian government.  

Any of these could be an excellent choice for investors seeking to ride out the current surge and bullish outlook on the Indian market. The three products have a decent Zacks ETF Rank of 3 or ‘Hold’ rating (see: all the emerging Asia Pacific ETFs here):

EGShares India Infrastructure Index Fund ((INXX - Free Report) )

This ETF provide exposure to the growing infrastructure corner of the broad Indian market by tracking the Indxx India Infrastructure Index. Holding 30 stocks in its basket, the fund allocates higher to Bharat Heavy Electrical, Tata Steel and Larsen & Tubro with a combined 20% share.

From a sector look, industrials take the top spot with over 41%, closely followed by utilities (nearly 22%), basic materials (12%) and telecom (12%). The product is unpopular and illiquid with AUM of $15.2 million and average trading volume of about 16,000 shares. Further, the fund charges a higher fee of 85 bps per year and gained over 7% in the past five days.

iShares India 50 ETF ((INDY - Free Report) )

This fund follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. ITC, Infosys and Reliance Industries occupy the top three positions in the basket with a combined 24% of assets. The product is widely spread out across number of sectors with banks (20.06%), software (17.31%) and cigarettes (8.72%) taking the top three spots.

The ETF has amassed $449.1 million and trades in volume of nearly 165,000 million shares a day, suggesting some extra cost in the form of tight bid/ask spread beyond the expense ratio of 0.93%. INDY added nearly 5.2% over the past five trading sessions (read: India ETF in Focus on Recent Rate Hike).   

WisdomTree India Earnings Fund ((EPI - Free Report) )

This product tracks the WisdomTree India Earnings Index, holding 169 securities in its basket. The fund is heavy on financials with one-fourth share, while energy, information technology and industrials get double-digit allocation in the basket. Reliance Industries, Infosys and Oil & Natural Gas are the top three holdings with a combined 22% of assets.

EPI is the largest and most popular ETF targeting India with AUM of $841.3 million and average trading volume of more than 4.3 million shares. Expense ratio came in at 0.83%. The fund was up over 5% over the past week.

Bottom Line

These products are clearly outpacing the broad U.S. market fund (SPY - Free Report) , emerging Asia Pacific fund (GMF - Free Report) and the broad emerging market fund (VWO - Free Report) by wide margins. This trend is likely to continue at least for the near term given the promising trends, improving economy and a bullish outlook for post-election boom.

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