India: Investors Are Betting On a Hot Economy

By Tom LydonETFsFOXBusiness

Among the best performing areas of the emerging markets, India country-specific exchange traded funds have made a drastic surge since the start of the new year.

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Specifically, the India ETFs that focus on small capitalization stocks have been among the best performers in the emerging markets category year-to-date, with the Columbia India Small Cap ETF (NYSEArca: SCIN) up 15.8%, VanEck Vectors India Small-Cap Index ETF (NYSEArca: SCIF) 15.3% higher and iShares MSCI India Small-Cap ETF (BATS: SMIN) up 14.6%.

New Delhi projects India's economy could expand between 6.75% and 7.5% in 2017-18 as the government shifts tactics on its economy.

India's market suffered a blow at the end of 2016 after Prime Minister Narendra Modi yanked about 86% of all cash from the economy to fight so-called black money to fight back against the huge shadow economy.

While the economy may experience a short-term setback from the move, the results of demonetization could usher in long-term benefits to the economy.

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Moreover, the Indian economy is set to implement other structural reforms, including a proposed Goods and Service Tax that could bolster growth by another 10%.

Prime Minister Modi has also hinted at encouraging SMEs, or small and medium enterprises, with tax relaxation and new incentives offered toward small business owners. The government has brought a renewed focus on SMEs to capture a larger market space.

The economy as a whole is also on a more stable ground and is stronger than most of its developing market peers. India is enjoying one of the world's fastest growth rates, improved fiscal discipline, a stable rupee currency, moderate current account deficit and slowing inflationary pressures.

With the country's renewed focus on its domestic economy and growth among smaller business, India small-cap ETFs have been leading the charge in the recent rebound.

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SCIN tries to reflect the performance of the Indxx India Small Cap Index, which is comprised of a maximum 75 companies in the small-cap segment in India. The Columbia offering focuses on banks 13.9%, followed by construction & engineering 11.9% and pharmaceuticals 7.0%.

SCIF tracks the MVIS India Small-Cap Index of small-cap companies in India. The fund has a broader 158 components and is more sector heavy on industrials 21.5%, followed by consumer discretionary 19.7% and financials 17.0%.

SMIN follws the MSCI India Small-Cap Index and is the most diversified with 256 components, with a heavy sector weight toward consumer discretionary 22.6%, followed by financials 19.4% and industrials 16.9%.

While each of the three are "small-cap" ETFs, the iShares offering includes a 11.5% tilt toward large-cap names and a big 61.5% position in mid-caps. The Columbia ETF does not have large-cap exposure, but it does include a large 59.8% weight toward mid-caps. SCIF may be the closest to a small-cap focus, with 71.7% small-caps and 6.9% micro-caps exposure.

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