Someone Sees More Upside For This India ETF

India exchange-traded funds are lagging broader emerging markets indexes year-to-date, but that does not mean there is not momentum for the India trade.

For example, the WisdomTree India Earnings Fund (ETF) EPI, one of the largest India ETFs trading in New York, is up an admirable 13.4 percent year-to-date — with much of those returns arriving over the past 90 days, a period in which EPI is up nearly 11 percent.

Who's On First?

There are reasons to believe that run is more "early" than "late innings." A catalyst for EPI and India's broader market is a familiar one for many emerging markets: the financial services sector. The $1.48 billion EPI allocates 26.5 percent of its weight to the financial services group.

Often one of the largest sector allocations in a plethora of diversified and single-country emerging markets ETFs, financial services names play a pivotal role in determining the fortunes of these funds. That could prove to be good news for EPI. Non-performing assets (NPAs) have been an issue for Indian banks, one that is being worked through now.

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It seems some traders are betting on more upside for EPI, as the ETF some unusual options activity last Friday, according to Street One Financial Vice President Paul Weisbruch.

“Trading volume in this ETF on Friday was roughly double the typical daily volume, where nearly 7.5 million shares traded. This morning EPI is once again higher, trading at its highest levels since August of 2015,” said Weisbruch. “The recent three day rally in the greater Emerging Markets space certainly has not hurt India, which comes in at an 8 percent weighting of the MSCI Emerging Markets Index.”

On Monday, a good day for U.S. and emerging markets equities, EPI was one of 175 ETFs to hit 52-week highs and one of six India ETFs to accomplish that feat.

Indian stocks are pricey compared to the MSCI Emerging Markets Index, but EPI helps ameliorate that problem by allocating more than half its weight to the quartile of Indian stocks with the lowest valuations.

The ETF's underlying index holds the most profitable Indian companies that are accessible to foreign investors. Profitability is the key there at a time when emerging markets earnings growth is, at best, anemic.

Year-to-date, EPI is the second-best performer among India large-cap ETFs and is beating the largest China ETF by almost 300 basis points.

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