A Smart Way To Play A Hot Emerging Market

Emerging markets stocks and exchange traded funds have been stout performers in 2017. The MSCI Emerging Markets Index is up 13.4 percent, more than double the 5 percent returned by the S&P 500 this year.

Within the emerging markets space, there are some obvious leaders through the first quarter with India being a member of that pack. Remember, India stocks and ETFs have been soaring after the country, in November, removed high-denomination currency notes from circulation. That was seen as a controversial move because it affected more than 85 percent of Indian currency in circulation at the time.

The WisdomTree India Earnings Fund (NYSE:EPI), one of the largest and oldest India ETFs trading in New York, is one of the India funds in rally mode. EPI, which has $1.53 billion in assets under management, is up 18.2 percent year-to-date, an advantage of almost 500 basis points over the MSCI Emerging Markets Index. India is the fourth-largest country in that widely followed emerging markets benchmark at a weight of 8.5 percent.

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.

EPI allocates about 45 percent of its weight to financial services and energy stocks. While that may sound like par for the course with single-country emerging markets ETFs, that sector mix is proving advantageous for EPI.

Most of the outperformance comes from the Energy and Financial sectorsthe top two relative over-weights in WTIND (EPI's index), said WisdomTree in a recent note. At a higher level, these sector and stock selections are driven by WTINDs methodology, which selects only profitable companies and then weights them by their profits, or net income, to be precise.

EPI is also underweight healthcare and consumer sectors, groups that in India have been trailing financials and energy. For example, healthcare and consumer staples stocks combine for just 10 percent of EPI's weight.

An immediate outcome of this index methodology is that it more fundamentally emphasizes profits. In comparison, the MSCI India Index, which follows a market cap-weighted indexing process, selects and weights companies simply by their market cap size. Because WTIND weights by profits, the more profitable a company is, the greater its weight in the Index, said WisdomTree.

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