India Keeps Key Rates Unchanged: ETFs In Focus

The Reserve Bank of India (RBI) on Wednesday, June 7, 2017 left its repo rate, the rate at which the RBI lends to banks, unchanged at 6.25%. It also kept its reverse repo rate intact at 6%, the rate at which it borrows from the banks. The last decline in key rates was in October 2016, when the repo rate was reduced by 25 basis points. The RBI however reduced its Statutory Liquidity Reserve (SLR) requirement, rate of deposits that banks have to park in government bonds, by 50 basis points to 20%.

While the RBI delivered a less-hawkish tone in its Monetary Policy Committee (MPC) meeting, it is still adopting a neutral stance on rates, to check if the current scenario of low inflation persists. Moreover, the primary focus will be on the new Goods and Services Tax (GST) policy which will be implemented by the government from July 1, 2017. The government has been pressurizing them to cut rates in order to induce private spending to tackle the slower-than-expected economic growth.

India’s GDP grew 6.1% in the first quarter of 2017, a decline from 7% in the previous quarter. The fall is primarily being attributed to declining consumer spending after the Prime Minister dealt a huge blow to the country’s currency by rendering high denomination notes useless in November 2016. The demonetization program removed 86% of the country’s currency in circulation. The RBI Deputy Governor B.P. Kanungo said that approximately 82.6% of the economy has been re-monetized.

An indicator of economic growth, the Gross Value Added (GVA) forecast was reduced to 7.3% for the year ending March 2018, down 0.1% from its previous forecast of 7.4%.

Let us now discuss a few ETFs focused on providing exposure to the emerging market nation (see all Asia-Pacific (Emerging) ETFs here).

iShares MSCI India ETF INDA

This fund provides exposure to large and mid-sized Indian equities.

It has AUM of $5.12 billion and charges a fee of 71 basis points a year. Financials, Computer-Software, and Consumer Discretionary are the top three sectors of the fund, with 23.15, 13.94% and 12.92% allocation, respectively (as of June 8, 2017). Housing Development Finance Co, Infosys Ltd, and Reliance Industries Ltd are the top three holdings of the fund, with 9.10%, 6.49% and 6.39% allocation, respectively (as of June 8, 2017). The fund has returned 20.32% in the last one year and 22.90% year to date (as of June 8, 2017). INDA currently has a Zacks ETF Rank 2 (Buy) with a Medium risk outlook (read: Why India ETFs are Soaring in 2017).

WisdomTree India Earnings Fund (TO:EPI)

This fund provides exposure to Indian equities in multiple capitalization segments.

It has AUM of $1.66 billion and charges a fee of 84 basis points a year. Financials, Energy, and Information Technology are the top three sectors of the fund, with 25.76%, 20.15% and 16.59% allocation, respectively (as of June 8, 2017). Reliance Industries Ltd, Infosys Ltd, and Housing Development Finance Co are the top three holdings of the fund, with 10.41%, 6.62% and 6.37% allocation, respectively (as of June 8, 2017). The fund has returned 28.19% in the last one year and 25.25% year to date (as of June 8, 2017). EPI currently has a Zacks ETF Rank 2 with a Medium risk outlook (read: India ETFs: More Run Ahead?).

iShares India 50 ETF (JK:INDY)

This fund provides exposure to large-cap Indian equities.

It has AUM of $908.45 million and charges a fee of 94 basis points a year. Banks, Computer-Software, and Refineries/Marketing are the top three sectors of the fund, with 26.31%, 11.46% and 8.33% allocation, respectively (as of June 7, 2017). ITC Ltd, Housing Development Finance Co, and Reliance Industries Ltd are the top three holdings of the fund, with 7.30%, 7.02% and 6.14% allocation, respectively (as of June 7, 2017). The fund has returned 23.36% in the last one year and 25.75% year to date (as of June 8, 2017). INDY currently has a Zacks ETF Rank 2 with a Medium risk outlook.

Let us now compare the performance of these ETFs to a broad emerging market ETF, EEM.

iShares MSCI Emerging Markets ETF (NYSE:EEM) EEM

This fund focuses on providing a diversified exposure to emerging markets.

It has AUM of $32.02 billion and charges a fee of 72 basis points a year. The fund has 8.8% exposure to India and over 55% is allocated to China, South Korea, and Taiwan (as of June 8, 2017). Information Technology, Financials, and Consumer Discretionary are the top three sectors of the fund, with 25.02%, 23.34% and 10.77% allocation, respectively (as of June 8, 2017). Tencent Holdings Ltd, Samsung Electronics (KS:005930) Ltd, and Taiwan Semiconductor Manufacturing are the top three holdings of the fund, with 4.21%, 4.18% and 3.68% allocation, respectively (as of June 8, 2017). The fund has returned 27.48% in the last one year and 19.77% year to date (as of June 8, 2017). EEM currently has a Zacks ETF Rank 3 (Hold) with a Medium risk outlook.

Bottom Line

Despite these headwinds, the fundamentals of the Indian economy on a standalone basis seem to be appealing. Comparing the year-to-date performance of the India ETFs and the broad emerging market ETF, we can see that Indian equities have outperformed their other emerging market counterparts so far this year.

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