The rebound in Indian equities fueled by government action to loosen restrictions on foreign investment caught plenty of investors off guard. After Standard & Poor's lowered its outlook on India's credit rating to negative from stable in April, investors fled stocks in Asia's third-largest economy, punishing India ETFs in the process.
When those funds started to bounce, prompting a series of bull calls from noted analysts, some money managers were caught asleep at the wheel. The efforts of those managers to play catch up with the Indian stock market prompted surging inflows into India-specific ETFs.
Unexpected reforms announcement by the government have buoyed the recent returns of ETFs ranging from the WisdomTree India Earnings ETF (EPI) to the Market Vectors India Small-Cap ETF (SCIF). Many foreign institutional investors prefer ETFs such as EPI and SCIF as a way of tapping resurgent Indian stocks due to a perceived lack of liquidity in the country's equity market.
All that means inflows to India ETFs have surged in recent months. Take the examples of EPI and one of its primary rivals, the PowerShares India Portfolio (PIN). In late May, EPI had just over $700 million in AUM while PIN had a little more than $300 million, according to India ETFs.
As of October 23, EPI's AUM total had swelled to over $1 billion. PIN will start trading today with almost $386 million in AUM. In the past 90 days, EPI and PIN are up 12.3 percent and 10.8 percent, respectively.
Interestingly, valuations on some India ETFs remain compelling. WisdomTree re-balanced the India Earnings Index, the index EPI tracks, in late September and thatdragged the index's P/E down to 8.8. PIN's P/E ratio at the end of September was 14.85, indicating the fund is cheaper on that basis than the iShares MSCI Brazil Index Fund (EWZ).
Robust inflows to India-specific ETFs have not been exclusively reserve for EPI and PIN. The iShares S&P India Nifty 50 Index Fund (INDY) has seen its AUM total steadily rise since late 2011. At that time, INDY had $225 million in AUM. At the close of U.S. markets on Wednesday, that number was almost $294 million.
There are obstacles and surprises, though. Obstacles loom in the form of catalysts, or lack thereof. Money has started trickling out of India ETFs in recent weeks as some investors view the funds as overbought and in need of a spark to continue moving higher. That spark could be an interest rate cut from the Reserve Bank of India, but there are no guarantees on that front.
Surprises include the fact that the EGShares India Consumer ETF (INCO) and the EGShares India Infrastructure ETF (INXX), two of the best-performing India ETFs over the past 90 days, have not seen much in the way of inflows, according to Index Universe data.
Another issue is how foreign institutional investors choose to access India. Given the country's small weight in some benchmark global indexes (India represents less than seven percent of the MSCI Emerging Markets Index), some investors prefer to access India through a multi-country emerging markets ETF such as the iShares MSCI Emerging Markets Index Fund (EEM) rather than with India-specific funds.
In part, India's small weight in broader global indexes explains why India-specific ETFs trail some China funds in terms of AUM. The AUM totals for EPI, INDY and PIN could be added, then tripled and the resulting number would still trail the iShares FTSE China 25 Index Fund's (FXI) assets by about $900 million.
Perhaps that implies India ETFs have room for growth. If the government can execute recently announced firms to the country's fullest advantage while bolstering infrastructure, then India ETFs could be compelling long-term bets.
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