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India ETFs Spike on First Rate Hike in 4 Years

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The Reserve Bank of India (RBI) ended the rate-easing cycle by raising interest rates for the first time in more than four years, citing concerns over rising inflation. It surprised the markets by keeping its stance neutral instead of tightening as expected by many economists.

The central bank hiked its key interest rate (i.e. repo rates - the short-term lending rate at which the bank lends money to commercial banks) by 25 bps to 6.25%. It also marks the first time that interest rates were increased since the Narendra Modi government came to power in May 2014. With this, India became the latest Asian country to increase rates after the Philippines and Indonesia in order to fight inflationary pressure and support the domestic currency.

Inflation has risen in the past six months on rising oil prices, a weakening rupee and increased consumer spending, and is well above the central bank’s medium-term target of 4%. Annual retail inflation accelerated to 4.6% in April. The RBI raised its inflation projection for the second half of fiscal 2018-19 (ends in March 2019) to 4.7% from the previous expectation of 4.4% (read: Will India ETFs Override Strong Dollar & High Oil Price?).

Additionally, Indian economy expanded 7.7% in the January-March quarter, representing the highest growth in two years. The growth trend is likely to continue, given increased investments and strong consumption. A normal monsoon will also lift economic growth in the coming months. As such, RBI reaffirmed its expectation for GDP growth of 7.4% for fiscal 2018-19 (ending March 2019).

The International Monetary Fund expects that India’s economic growth could rebound to 7.4% in fiscal 2018-19, up from an estimated 6.6% in the previous fiscal. The World Bank projects the Indian economy to grow 7.3% this fiscal and 7.5% in the next, making it the fastest growing country among major emerging economies. It stated that India's economy is robust, resilient and has the potential to deliver sustained growth.

Strong growth and rising inflation could pave the way for further interest rate hike in the months to come.

ETF Impact

Despite the rate hike, Indian stocks gained on RBI’s neutral stance. The smooth trading in the stock market sent India ETFs space into deep green in yesterday’s trading session. In particular, VanEck Vectors India Small-Cap Index ETF (SCIF - Free Report) and Columbia India Small Cap ETF (SCIN - Free Report) were the biggest gainers, climbing about at least 3% each. Invesco India ETF (PIN - Free Report) , iShares MSCI India ETF (INDA - Free Report) and Columbia India Consumer ETF (INCO - Free Report) were up nearly 2.4% each (see: all the emerging Asia Pacific ETFs here).

Below we profile these ETFs in detail and discuss some of the specifics behind their recent surge. All these funds have a Zacks ETF Rank #1 (Strong Buy) or #2 (Buy), which suggests that the outperformance is likely to continue:

SCIF

This fund targets the small-cap segment and tracks the MVIS India Small-Cap Index. In total, it holds 200 securities in its basket with none making up for more than 2.62% of the assets. Industrials, consumer discretionary, materials, financials and information technology are the top five sectors. The fund has so far amassed $237 million in its asset base while charging 72 bps in annual fees. Volume is moderate with more than 63,000 shares exchanging hands a day. SCIF has a Zacks ETF Rank #2.

SCIN

This fund follows the Indxx India Small Cap Index, and is unpopular and illiquid with $23.4 million in AUM and average daily volume of 15,000 shares. It has an expense ratio of 0.76%. Holding 76 securities, the ETF is pretty spread across components with each accounting for less than 3.4% share. The product is heavy on materials taking nearly one-fourth share while financials, industrials and information technology round off the next three spots. The fund has a Zacks ETF Rank #2 (read: ETFs from Best & Worst Zones of Q1).

PIN

This ETF follows the Indus India Index, holding 50 stocks in its basket and with double-digit allocation to the top two firms. Other firms hold less than 6.7% of the assets. Additionally, the fund is skewed toward financials at 23.4%, followed by energy (20.4%), information technology (16.4%), and materials (10.8%). PIN has accumulated $283.1 million in its asset base while trading in average daily volume of 72,000 shares. It charges 79 bps in annual fees and has a Zacks ETF Rank #1.

INDA

It offers exposure to large and mid-cap companies by tracking the MSCI India Index and charging 68 bps in fees per year from investors. Holding 79 stocks in its basket, the fund is highly concentrated on the top three firms that collectively make up for 25.4% share. Other firms hold no more than 7% share. Here again, financials dominate the fund’s portfolio with one-fourth share, closely followed by 15.8% allocation in information technology. INDA is the largest and the most popular ETF in this space with AUM of $4.9 billion and average trading volume of 3.8 million shares a day. It has a Zacks ETF Rank #1.

INCO

This ETF targets the consumer industry of India and follows the Indxx India Consumer Index. It holds 30 stocks in its basket with none holding more than 8.3% share. From a sector look, automobiles occupies the top position with 23.8% share while personal goods and auto components round off the next two places with at least 16% share each. The product has amassed $148.8 million in its asset base and charges 75 bps in annual fees. It trades in lower volume of 29,000 shares a day and has a Zacks ETF Rank #2.

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