Under The Hood: Betting On The Indian Consumer

The allure of the emerging markets consumer as an investment thesis has been well-documented and ETF issuers have seized up on this by offering both multi-country and country-specific emerging markets consumer plays. Brazil and China are among the countries represented by EM consumer funds. So is the "I" in BRIC, India, through the EGShares India Consumer ETF INCO. The EGShares India Consumer ETF, which debuted in August 2011, was plagued by the same issues that hamstrung other India ETFs last year. That means repudiation of emerging markets at large and India's infamous inflation woes. With an expense ratio of 0.89%, INCO is home to 30 stocks with an average market cap of $6.1 billion. The ETF is almost 72% allocated to consumer goods names with industrials and consumer services making up the rest of the fund's weight. Ten industry groups are featured in INCO, but personal products and automotive names represent close to 49% of the fund's industry weight. Combined, food producers, tobacco companies and beverage stocks account for another 20%. While the combination of India and the consumer under the umbrella of one ETF may appear risky, investors should note that INCO has a staples feel to it. Consider this: The Indian operations of global consumer staples giants Unilever UL, Nestle NSRGY and Colgate-Palmolive CL are found among INCO's top-10 holdings. Exposure to those sturdy names is a feather in INCO's cap, but investors might require more than that. After all, the ETF was down 10% since its debut as of January 25. Well, that situation has improved dramatically in the new year as the ETF is up close to 15%. That's more than double what the returns offered by the S&P 500. That's taking a short-term view of things, which is often a wise idea with some emerging markets ETFs. However, investors with longer time horizons can warm to INCO because the statistics are supportive of long-term Indian growth. Not only has it been speculated that India will eventually surpass the U.S. and China for the top spot among the world's largest economies (that's a long way off), there are more immediate growth possibilities with the Indian consumer. India's per capita GDP in 2011 as estimated by the International Monetary Fund was $1,527. That ranks 135th in the world. Said differently, India's per capita GDP lags a couple of the "-stan" countries, Albania, Bulgaria, Libya and a host of other dubious suspects. Or we could just say by that metric, India is by far the poorest BRIC country. In the case of INCO, poor could mean profitable opportunity. A move above the 200-day moving average around $18.50 would likely confirm further upside for INCO over the near-term.