Another Positive For India ETFs

Already among the best-performing single-country emerging markets exchange-traded funds this year, India ETFs could be further supported by the improving health of the country's big banks.

The WisdomTree India Earnings Fund (ETF) EPI, one of the largest India ETFs trading in the U.S., is up 25.2 percent year-to-date, good for one of the best performances among non-leveraged single-country emerging markets ETFs. Like many India ETFs, EPI's largest sector allocation is financial services. EPI devotes over a quarter of its weight to that sector.

What's Going On In India?

Indian regulators are making efforts to help the country's banks work through a pesky bad loan problem. That could spark shares of Indian banks higher, providing upside for ETFs such as EPI along the way.

“In the short term, this is likely to create provisioning costs that will mean continued pressure on bank profits, and it is possible that further losses will push some weaker banks closer to breaching minimum capital requirements, unless they receive pre-emptive capital injections,” said Fitch Ratings in a recent note. “However, the increased powers given to the Reserve Bank of India (RBI) to clean up asset quality, and to intervene in banks at an earlier stage when risks build, represents an important positive step toward ensuring a healthy banking system in the future.”

EPI tracks the WisdomTree India Earnings Index, which is similar to the issuer's family of earnings-weighted domestic indexes in that member firms are weighted by earnings. That methodology can ensure profitability and enhance the benchmark's quality profile.

More About EPI: Methodology

EPI's weighting methodology has been applied to broad market U.S. equity strategies with a long run of success. Emphasizing profitability with a volatile emerging market like India has also proven to be a smart alternative to traditional cap-weighted India funds.

How quickly India moves, often a concern with the country's economy and political system, to solve the bad loan issue is another issue to monitor.

“Regulation to speed up resolution is the logical next step to follow the asset-quality review and other measures that increased recognition of bad loans over the last two years,” said Fitch. “This was important as there has been little evident progress on bad-loan resolution, while the NPL stock has continued to rise, albeit at a slowing pace. We believe this natural progression reflects stronger intent and willingness from the authorities to address the problem. There will be significant implementation challenges, but asset resolution is likely to strengthen over the next few years.”