Despite a pullback in August, the Indian equity market has continued to rise. Soaring 13.5% so far this year, the Morningstar India Index outperformed the EM Index’s 6.4% return.
Investors are buying the India story. In the offshore open-ended fund market, India equity has absorbed US$ 1.7 billion so far this quarter. The total new subscriptions to the category amount to US$ 2.6 billion.
Other than top-rated mutual funds available for sale locally, exchange traded funds, or ETFs, are a cost-effective vehicle to invest in foreign securities. Since July, India equity ETFs collectively received new net flows of US$ 1.4 billion, representing the best non-U.S. equity category by subscription.
China Vs. India? It Isn’t One or the Other
U.S.-listed China region ETFs were among the categories recording the largest outflows so far this quarter totaling US$ 833 million.
In the past two months, China equity funds set up in the offshore jurisdictions are the second worst equity category by flows, as investors pulled a total of US$ 1.6 million. The only category that did worse was global emerging markets equity, that saw US$ 2.7 billion outflows. China equity – A shares category also suffered an exodus of US$ 1.1 billion.
It’s hard to conclude whether the robust stream of inflows into Indian equities is a result of redemptions from China investments. But India offers investors something that China cannot, says Singapore-based Chetan Sehgal, director of portfolio management for the Franklin Templeton Emerging Markets Equity.
Sehgal says: “India offers investors a significant growth opportunity given its structural tailwinds, which include attractive demographics, a market-oriented economy, and a rising middle class.”
He continues: “While India will not overtake China in terms of its contribution to global economic growth in the coming decade, we believe India will make a meaningful contribution to growth, as well as account for an increasing share of our investment portfolios.”
Franklin Templeton is Optimistic on India’s Improved Macroeconomic Fundamentals
While India’s growth opportunity was previously constrained by bottlenecks in infrastructure, bureaucracy, and a weak fiscal position, Sehgal thinks infrastructure investment has surged and the ease of doing business has improved over the past decade. Importantly, the government’s fiscal position has been transformed by improved tax collection and the introduction of a national value-added tax.
He also highlights that a resilient Indian rupee in the current Fed hiking cycle compared to prior cycles shows a more solid domestic demand than before. “From a risk perspective, India’s macro-economy is more robust, inflation has structurally declined, and geopolitics is less fraught due to India’s non-aligned stance,” he adds.
Top-Rated India Equity ETFs
For investors who want to buy the India growth story, ETFs are practical tools for achieving this very specific exposure.
We looked up Morningstar’s research and proprietary data for the top ETFs with exposure to the region. Four ETFs have a Morningstar Medalist Rating of Silver or better. They are U.S.-listed vehicles but are accessible via local brokers.
Gold-rated iShares India 50 ETF (INDY) provides investors with exposure to the 50 largest Indian companies listed on the National Stock Exchange. The portfolio has one-third of its assets in financial services. Among the top 10 holdings, five are banks, including the largest holding of 13.9% in HDFC Bank.
Also managed by iShares and earning a Gold rating, the iShares MSCI India Small-Cap ETF (SMIN) had an even better run this year, returning 22.8% in U.S. dollar terms. Owning more than 400 small- and mid-cap names, SMIN is more diversified and is less top-heavy than its peers. Differing from the ETF tracking the largest-cap stocks, SMIN has a larger exposure to industrial and basic materials than financials. But, the largest single-stock position is a US$ 5.4 billion technology company, Persistent Systems.
The two Silver-rated ETFs we found, Invesco India ETF (PIN) and WisdomTree India ex-State-Owned Entrprs (IXSE) track companies rather than by market capitalization.
The Invesco tracker mimics the FTSE India Quality and Yield Select Index and returns 12.8% this year. The 169-stock portfolio is overweight in energy and technology relative to the category average, each representing a mid-teen exposure.
The WisdomTree ETF has 144 holdings and the index it tracks aims to exclude state-owned enterprises. The ETF is also the cheapest selection among the four top vehicles. The top holding is Reliance Industries, which takes up 9.24% of the portfolio. The second and third holdings, Infosys and ICICI Bank, each weigh around 7%.
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