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

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