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India will remain the fastest growing large economy in the world and will overtake the UK’s spot as the fifth biggest economy, according to consultancy firm PwC. The US investors can participate in India’s growth through exchange-traded funds. There are a number of India-focused ETFs but the iShares MSCI India ETF (INDA) is the biggest, with $4.64 billion of assets under management, and arguably the most famous.
INDA, however, lacks diversification since it focuses on just the large-cap stocks, ignoring hundreds of other mid-to-small-cap companies which are a crucial part of India’s economy. In this article, I’ll discuss the WisdomTree India Earnings Fund (EPI) which gives investors exposure to the large-caps as well as hundreds of relatively smaller Indian companies. EPI is not as big as INDA in terms of AUM but it is still the second-largest and one of the most liquid India-focused funds. However, investors should exercise caution since EPI could experience volatility in the near-term.
Image courtesy of Pixabay
India is the fastest growing large economy in the world. For 2018, the country could post 7.3% real GDP growth, as per data from the International Monetary Fund. That’s substantially higher than the 6.6% projected for China and the average 4.7% growth for the emerging markets and developing economies. India benefits from having an enormous population of 1.33 billion people which means that the country alone accounts for almost 18% of the world’s population or 21% of the emerging market’s population. The country is behind only China which has more than 1.4 billion people. On top of this, India also benefits from having favorable demographics with a median age of just 27.9 years, substantially lower than China’s 37.4 years. Moreover, India has substantial room for future growth considering that its GDP on a per capita basis is still one of the lowest in the world of just $2,016. Neighboring China’s GDP per capita is nearly 5-times larger at $9,630 while the average of advanced economies sits at $48,000, as per data from the IMF.
The Indian government has also taken various structural reforms which could put the country on a solid foundation for long-term growth. The country has, for instance, introduced a nationwide consumption tax last year to help increase tax collections. India has also eased restrictions on foreign capital and opened a number of key sectors to foreign investors, including defense, construction, and insurance industries. This can give a boost to foreign direct investments and improve India’s integration with global markets. India has also made amendments to the Insolvency and Bankruptcy Code to improve the health of the country’s banking sector. The Indian government is also running a Make In India campaign to lift domestic manufacturing. Moreover, the dip in oil prices to this year’s lowest levels could also work out well for India which is a net importer of energy.
India’s economic growth is forecasted to accelerate to 7.4% in 2019, and 7.7% in the subsequent years through 2022, as per IMF. At the same time, China’s growth will slow down to 5.8% in 2022. This will solidify India’s position as the fastest growing major economy and a key driver of global economic growth. Through WisdomTree India Earnings Fund, US-based investors can profit from India’s growth.
Image: Author
WisdomTree India Earnings Fund tracks the investment results of all profitable companies in the Indian equity market which meet WisdomTree’s market cap (more than $200Mn) and liquidity requirements. As indicated earlier, EPI is the second-largest India-focused fund with $1.50 billion of assets under management. It is also one of the most liquid India-focused funds with daily trading volume of more than 2 million shares (3-month average).
The iShares MSCI India ETF tracks the performance of around 80 large-cap and well-established Indian companies. The WisdomTree India Earnings Fund, on the other hand, measures the performance of all Indian companies that are profitable and eligible to be purchased by foreign investors. INDA is essentially a market-cap-weighted ETF while EPI is an annual earnings weighted fund.
This means that in EPI, the top companies are typically the ones which have generated most profits in the trailing twelve months period. As a result, a company which is valued richly by the market but has generated little profits (such as the technology companies) in its recent past could become one of the top holdings of a market-cap weighted ETF like INDA but not EPI. A key benefit of this approach is that it can tilt the portfolio towards lower valuation companies while avoiding expensive stocks that may have greater exposure to market weakness.
EPI benchmark (WTIND) P/E ratio vs. INDA benchmark (MXIN) P/E ratio. Image: WisdomTree
Moreover, EPI has a diversified portfolio which lowers its risk profile since any negative impact of a meltdown of a single company or a sector is spread over hundreds of companies. EPI’s top-3 holdings are India’s largest housing finance company Housing Development Finance Corp., oil-to-telecom conglomerate Reliance Industries, and the IT-services company Infosys (INFY).
Overall, EPI’s portfolio consists of more than 340 companies. Naturally, the weighting of a vast majority of companies is less than 1% each but no single company gets more than 10% of the fund’s assets which shows that the fund isn’t tilted towards any single stock. Even the top-10 companies don’t get a majority of the fund’s assets. As shown in the table below, the combined weighting of EPI’s ten largest holdings is just under 40% while the remaining companies account for a little more than 60% of the fund. I believe this broad diversity is EPI’s biggest strength and that’s something which investors won’t get with INDA.
Diversified portfolio: Image: Author. Source: WinsdomTree
EPI’s drawback, however, is that this is an expensive fund as compared to other ETFs. EPI comes with an expense ratio of 0.84% which means that it charges $84 on every $10,000 of investment. On the other hand, INDA charges an expense ratio of 0.68%, the iShares MSCI India Small-Cap ETF (SMIN), which focuses on more than 250 small-cap companies, charges 0.75%, and the Invesco India ETF (PIN), which tracks 50 of the largest Indian companies in terms of market cap, has an expense ratio of 0.79%. The newly created Franklin FTSE India ETF (FLIN) is the cheapest India-focused fund with an expense ratio of just 0.19%. However, these ETFs lag behind EPI in terms of portfolio depth and diversity.
It is also important to remember here that exposure to India through EPI isn’t without risks. Although India continues to register strong economic growth, it is facing some headwinds that may drag its performance in the near-term. An environment of rising interest rates and weakening rupee, in particular, can have a negative impact on the domestic equity markets and economic growth. At the start of the year, the Indian currency was trading Rs 63.80 to a dollar but its value weakened to Rs 70.10 at the time of this writing.
At the same time, the country is preparing for general elections which will be held in Q2 2019; this could fuel uncertainty in the market since the pro-business incumbent Prime Minister Narendra Modi – who is responsible for the ongoing economic reforms – and his Hindu nationalist Bharatiya Janata Party (BJP) have lost some key state-level elections this month. BJP’s heavy losses or defeat in the upcoming elections may spook the equity markets and EPI investors since it fuels policy uncertainty and creates doubts about the future of economic reforms.
In short, I believe EPI is a great fund for those investors who wish to invest in a broad array of Indian companies and are comfortable with paying a slightly high price for it. But investors should exercise caution before loading up on EPI.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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