Being Selective With India ETFs

It often pays to be choosy, and that is particularly true with exchange-traded funds. That advice should also remind investors that simply because a group of ETFs focus on the same country doesn't mean these funds are carbon copies of each other.

Examining differences among various ETFs is a potentially fruitful endeavor for investors considering India exposure. Year to date, the four largest India ETFs trading in the U.S. are outperforming the MSCI Emerging Markets Index, but how those ETFs deliver that out-performance is almost as important as the fact that out-performance is being delivered at all.

Being Choosy With India

The WisdomTree India Earnings Fund EPI remains one of the more durable and impressive options among India large-cap ETFs. EPI is not only of this year's best-performing ETFs tracking Indian large-caps, the ETF is topping the MSCI Emerging Markets Index by more than 400 basis points. Importantly, India's economy, Asia's third-largest, is domestically driven.

“India is largely driven internally, with nearly 60 percent of its gross domestic product (GDP) from household consumption. This is more than 1.5 times that of India’s northern neighbor, China,” said WisdomTree in a recent note. “When we combine these high consumption numbers along with India’s demographics, its rising middle class and its projected GDP numbers from the IMF, we have the world’s largest growing, accessible economy that is internally driven, with consumption as its fundamental driver.”

The $1.64 billion EPI, which turned 9 years old earlier this year, does have an emphasis on India's domestic economy. In addition to a 25.5-percent weight to bank stocks, consumer sectors combine for almost 14 percent of the ETF's weight.

EPI's underlying index holds the most profitable Indian companies that are accessible to foreign investors. That is a noteworthy methodology because it ensures investors are getting exposure to companies that are making money. EPI's index methodology can also prove advantageous at a time when emerging markets earnings are finally showing incremental signs of rebounding after a multi-year malaise.

“In addition, India has been making giant strides to improve its economy and make its markets efficient through a host of reforms and incentives,” said WisdomTree. “This makes Indian equities a key component of our blend for consumption as well as growth of EM.”

EPI holds over 300 stocks, two-thirds of which are large-caps and more than 22 percent are mid-caps.