Investing In India – ETFs

This article also appeared at The Motley Fool.

India is one of the major emerging market economies. The Indian stock market is well established and the roots of the Bombay Stock Exchange (BSE) go all the way back to the mid 1800s, making it the oldest in Asia. It is the 10th largest stock exchange in the world by market cap, and the No. 1 in the world based on number of listed companies – around 5,000. The other large Indian Exchange, the National Stock Exchange (NSE) is the 11th largest in the world by market cap.

And even though the Indian indexes are correlated with emerging market indexes, they are not significantly correlated with American indexes. India presents a good way to diversify your portfolio by investing in a major emerging market with well-established exchanges in a democratic government.

Until recently, there were not many options to invest in India. However, in the last few years, investors in the U.S. have gained several ways to invest in India: ETFs, CEFs, one ETN, regular old mutual funds, and individual ADRs. For this first article, I’ll focus on broad market index ETFs that focus on India, and ignore the specialized and leveraged ones. That list boils down to…

EPI WisdomTree India Earnings Fund
PIN PowerShares India Portfolio
INDY iShares S&P India Nifty 50 Index Fund
INDA MSCI India Index Fund

Let’s look at these in more detail.

ETF Morningstar Rating CAPS Rating Expense Ratio Index Tracked
WisdomTree India Earnings Fund (NYSEMKT: EPI) *
0.83% WisdomTree India Earnings Index
PowerShares India Portfolio (NYSEMKT: PIN) *
0.79% Indus India Index
iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) ***
0.92% S&P CNX Nifty
MSCI India Index Fund (NYSEMKT: INDA) n/a n/a 0.67% MSCI India Index

How the indexes work

The Wisdom Tree index is an earnings-weighted index adjusted by availability of shares to foreign investors. It consists of 220 companies, all of which are profitable.

The Indus India index is a proprietary index with 50 components chosen from a universe of the 200 largest companies by market cap on the BSE and NSE.

The Nifty is a market cap-weighted index of Indian equities, consisting of 50 Indian large caps covering all market sectors. These 50 companies comprise two-thirds of the market cap of all stocks listed on the NSE.

The MSCI India Index consists of 73 components and covers 85% of “the indian equity universe”.

Essentially even though their numbers of components are different, all these indexes represent a similar collection of large-cap Indian stocks.

INDY and INDA are relatively new, so it is difficult to do a comparison with charts. However, we can substitute the iPath MSCI India Index ETN for INDA, because they track the same Index. For the purposes of this article, the differences between ETFs and ETNs can be ignored, except for one: The ETN tracks the total returns of the index and doesn’t pay a dividend, so it is relatively tax-advantaged.

ETF Morningstar Rating CAPS Rating Expense Ratio Index Tracked
iPath MSCI India Index ETN (NYSEMKT: INP) *
0.89% MSCI India Index

Now we can do some comparison.

 

I’m not exaclty sure why Morningstar has decided to give INDY a three-star rating, while the rest get a one-star rating because if you look at the “Funds in Category” total, Morningstar says 4. So among the four very similar ETFs that it ranks, Morningstar has decided that one is three-star, and the rest are one-star. In this case, however, the choice is simple: Just ignore Morningstar.

Here is what to do. If you don’t care about paying taxes on dividends or getting them paid as cash, pick the lowest expense ratio fund. Otherwise, pick INP.

Disclosure: Long INP

Ups and Downs, India, Apple

Over the last few weeks, the Indian stock market skyrocketed after the elections and most of my Good Till Cancelled orders for buying INP are of no use now. I missed the opportunity to buy then and I might get in slowly at dips.

One stock I did acquire is Apple. Even though it is still below my average buying price, it is very close to breaking even and might be one of the few gems that might make some money for me going forward. Even though I own no apple products, I see everyone around me has them. At tech meetings at UVA, I see half the people carrying iPhones and I seem to be the only one with an HTC Touch Pro (or any WinMo phone for that matter). People will live with poor service form AT&T and no 3G coverage but they still want their iPhones. I went to an iPhone development meeting and it turns out you need a Mac to develop apps for an iPhone! And everybody wants to make apps for iPhones. So indirectly that is a driver for Mac sales.

My hopes are on a recovery of the stock market over the coming years and I switched from a state pension plan to the University’s own retirement plan (about 10% of salary is put in your account and fully vested immediately with no matching requirement from the employee). It costs the University less than the state pension plan (for which the University contributes just over 11% – 5% goes to you, vested in 5 years and the remaining 6.something% goes to the state)