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Zacks Top Ranked India ETF in Focus: INDY

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In recent times, developed markets like the U.S. and Europe have been plagued by a high debt burden, unemployment and creeping concerns over inflation. These economic woes resulted in low growth, leaving little hope for improvement anytime soon, let alone signs of an astounding recovery.

Hence, in response to the anemic growth in West, investors have turned the spotlight on the Asia-Pacific economies that are offering greater potential due to a relatively higher growth prospects. To be specific, India has recently attracted a large influx of investor attention, thanks to a slew of positive reforms redefining the market demographics.

However, the picture isn’t entirely rosy in the East. The emerging markets in Asia have started to witness a slowdown owing to weaker domestic macroeconomic cues and policy tightening as well as a fragile export environment, which weighed on their performances in the recent times. Like any other emerging market, investing in Indian equities requires a steady appetite for risk (read India ETFs: Getting Back On Track?).

With some other countries, IMF estimates weakening growth in India. In its October projection, the agency cut its 2012 and 2013 growth forecast for India from 6.1% and 6.5% to 4.9% and 6.0%, respectively.

India as an Investment

Even though the estimates have been declining, India still remains a strong growth vehicle in the global map, especially compared to Western nations. A set of reformative measures, aimed primarily at building an investor-friendly climate, have created a buzz in the recent months and could rekindle growth levels across the nation.

While India’s economy is more sensitive to domestic demand, it is also true that the country’s capital markets are largely dependent on foreign portfolio flows from institutional investors. With the Indian Parliament’s vote for FDI in multi-brand retail, the government will proceed with the liberalization of this sector to bring in more foreign capital to promote economic growth. This led to a rally in the Indian equity markets on account of increased capital flows by foreign institutional investors (see Does Your Portfolio Need An India ETF?).

India is striving hard to avoid a credit downgrade and revealed a plan in November to record a fiscal deficit of 5.3% of GDP this financial year, higher than a previous target of 5.1% but lower than year-ago rate of 5.8%, suggesting that despite some bumps they are moving in the right direction.  

Investors looking to tap this economy in basket form can invest in S&P India Nifty 50 Index Fund (INDY - Free Report) , which has a Zacks ETF Rank of 1 or Strong Buy. We expect it to outperform some of its emerging market peers over the next year. Given this, the product could be worth a closer look by investors seeking exposure in this economy while also using our quantitative Ranking system.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).

For investors seeking to apply this methodology to their portfolio in the India market, we have taken a closer look at the top ranked INDY below:

S&P India Nifty 50 Index Fund (INDY)

Launched in November of 2009, iShares S&P India Nifty 50 fund (INDY - Free Report) is a passively managed ETF designed to provide broad exposure to the Indian equity market with a focus on resembling the risk-return characteristics of large cap equities with a medium to long-term view. The product has amassed a net asset base of $0.35 billion.

INDY seeks to match the performance and yield of the S&P CNX Nifty Index before fees and expenses. The Index is Indian rupee-denominated, free-float capitalization weighted and comprises 50 large cap stocks.

INDY provides an opportunity for diversification since the ETF is not strongly correlated with the S&P 500 index as indicated by an R-Squared value of 53.5% (see Do Country ETFs Really Provide Diversification?). The ETF is extremely pricey with an expense ratio of 92 basis points a year. The fund is liquid as it trades about 3.7 million shares per day on average.

INDY is heavily weighted towards Financials (21.20%), Computers Software (11.41%), Cigarettes (8.80%) and Refineries (7.89%) making up about half of the basket alone. Healthcare, Utilities and Telecommunication Services are sectors with lesser allocation. From an individual holdings point of view, the ETF holds 51 securities with almost 58% allocation to its top 10 holdings.

However, it is prudent to note that the top 10 holdings comprise stocks from a variety of sectors. ITC Limited (8.80%), Reliance Industries Limited (7.38%) and ICICI Bank Limited (7.04%) are the three top elements in the basket, with a combined share of 23.22%.

Further, the Indian economy is less vulnerable to the European crisis than many of its Asian counterparts, since India’s international trade with Europe is limited. The ETF is up by almost 27% so far this year. 

INDY has returned about 10.44% for the one-year period as of September 30, 2012. The product also pays an annual dividend yield of 0.48%. INDY has hit a low of $19.37 and 52-week high of $26.19. The fund is currently hovering near its 52-week high price and could be an interesting 2013 choice for investors seeking more emerging market exposure.

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