In recent times, developed markets like the U.S. and Europe have
been plagued by a high debt burden, unemployment and creeping
concerns over inflation. These economic woes resulted in low
growth, leaving little hope for improvement anytime soon, let alone
signs of an astounding recovery.
Hence, in response to the anemic growth in West, investors have
turned the spotlight on the Asia-Pacific economies that are
offering greater potential due to a relatively higher growth
prospects. To be specific, India has recently attracted a large
influx of investor attention, thanks to a slew of positive reforms
redefining the market demographics.
However, the picture isn’t entirely rosy in the East. The
emerging markets in Asia have started to witness a slowdown owing
to weaker domestic macroeconomic cues and policy tightening as well
as a fragile export environment, which weighed on their
performances in the recent times. Like any other emerging market,
investing in Indian equities requires a steady appetite for risk
(read India ETFs: Getting Back On Track?).
With some other countries, IMF estimates weakening growth in
India. In its October projection, the agency cut its 2012 and 2013
growth forecast for India from 6.1% and 6.5% to 4.9% and 6.0%,
respectively.
India as an Investment
Even though the estimates have been declining, India still
remains a strong growth vehicle in the global map, especially
compared to Western nations. A set of reformative measures, aimed
primarily at building an investor-friendly climate, have created a
buzz in the recent months and could rekindle growth levels across
the nation.
While India’s economy is more sensitive to domestic demand, it
is also true that the country’s capital markets are largely
dependent on foreign portfolio flows from institutional investors.
With the Indian Parliament’s vote for FDI in multi-brand retail,
the government will proceed with the liberalization of this sector
to bring in more foreign capital to promote economic growth. This
led to a rally in the Indian equity markets on account of increased
capital flows by foreign institutional investors (see Does Your
Portfolio Need An India ETF?).
India is striving hard to avoid a credit downgrade and revealed
a plan in November to record a fiscal deficit of 5.3% of GDP this
financial year, higher than a previous target of 5.1% but lower
than year-ago rate of 5.8%, suggesting that despite some bumps they
are moving in the right direction.
Investors looking to tap this economy in basket form can invest
in S&P India Nifty 50 Index Fund (INDY), which
has a Zacks ETF Rank of 1 or Strong Buy. We expect it to outperform
some of its emerging market peers over the next year. Given this,
the product could be worth a closer look by investors seeking
exposure in this economy while also using our quantitative Ranking
system.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, style
box or asset class. Our proprietary methodology also takes into
account the risk preferences of investors. ETFs are ranked on a
scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive
one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of the five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other products with a similar level of risk (see
more in the Zacks ETF Center).
For investors seeking to apply this methodology to their
portfolio in the India market, we have taken a closer look at the
top ranked INDY below:
S&P India Nifty 50 Index Fund
(INDY)
Launched in November of 2009, iShares S&P India Nifty 50
fund (INDY) is a passively managed ETF designed to provide broad
exposure to the Indian equity market with a focus on resembling the
risk-return characteristics of large cap equities with a medium to
long-term view. The product has amassed a net asset base of $0.35
billion.
INDY seeks to match the performance and yield of the S&P CNX
Nifty Index before fees and expenses. The Index is Indian
rupee-denominated, free-float capitalization weighted and comprises
50 large cap stocks.
INDY provides an opportunity for diversification since the ETF
is not strongly correlated with the S&P 500 index as indicated
by an R-Squared value of 53.5% (see Do Country ETFs Really Provide
Diversification?). The ETF is extremely pricey with an expense
ratio of 92 basis points a year. The fund is liquid as it trades
about 3.7 million shares per day on average.
INDY is heavily weighted towards Financials (21.20%), Computers
Software (11.41%), Cigarettes (8.80%) and Refineries (7.89%) making
up about half of the basket alone. Healthcare, Utilities and
Telecommunication Services are sectors with lesser allocation. From
an individual holdings point of view, the ETF holds 51 securities
with almost 58% allocation to its top 10 holdings.
However, it is prudent to note that the top 10 holdings comprise
stocks from a variety of sectors. ITC Limited (8.80%), Reliance
Industries Limited (7.38%) and ICICI Bank Limited (7.04%) are the
three top elements in the basket, with a combined share of
23.22%.
Further, the Indian economy is less vulnerable to the European
crisis than many of its Asian counterparts, since India’s
international trade with Europe is limited. The ETF is up by almost
27% so far this year.
INDY has returned about 10.44% for the one-year period as of
September 30, 2012. The product also pays an annual dividend yield
of 0.48%. INDY has hit a low of $19.37 and 52-week high of $26.19.
The fund is currently hovering near its 52-week high price and
could be an interesting 2013 choice for investors seeking more
emerging market exposure.
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ISHARS-SP INDIA (INDY): ETF Research Reports
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