INCO Columbia India Consumer ETF

Over the past month, investors have witnessed a reversal in the emerging market ETF world. Funds in this space, such as the ultra-popular VWO and EEM, have been lagging the U.S. market for much of 2013, but have finally turned it around the past few weeks.

Now, when looking at the past four week time frame, emerging markets are leading their domestic peers, suggesting that there may be some new leadership in the global markets. This is especially true when one considered which nation is leading to the upside; India.

India Economy in Focus

India ETFs have struggled mightily on a year-to-date basis, with many producing flat returns in the time frame. The country’s currency, the rupee, has been quite weak, while foreign investors remain skittish about putting more capital to work in the nation, leaving many questions about the country in the near term (see Time to Buy Emerging Market ETFs?).

But thanks to falling inflation rates, the country’s central bank has had more flexibility in terms of policy decisions. The bank has now cut rates three times this year, pushing the benchmark rate down to 7.5% for the country.

This has helped to keep growth at a solid clip, with yearly estimates for GDP growth coming in between 6% and 7%. Furthermore, given that India isn’t a commodity-centric emerging market like Brazil or Russia, the nation has largely benefited from the natural resource weakness as of late, adding to the bullish trend in the market lately (see Can India ETFs Continue Their Solid Run?).

So with the rupee finally bottoming out (at least for now), and inflation seemingly under control, many investors have decided to take another look at India ETFs for an investment. And over the past month, this has turned out to be a pretty good strategy as most have led the equity world higher.

In fact, popular India ETFs have added double digits in the past month, including small caps (SCIF), as well as large cap-focused funds (INDY) and (INP). This has crushed the broad market over the same time frame and many other emerging market indexes as well; EEM and VWO have produced returns of roughly 5.5% in the same time frame.

More Focused India Plays

Yet, while many India ETFs have done quite well over the past month, a few have truly led the pack higher with two adding more than 13.5% in the time frame. Below, we discuss these two specialized India ETFs that could be the real leaders of the India market in greater detail for investors seeking to make a play on this surging economy in ETF form:

EGShares India Consumer ETF (INCO)

With a lowered inflation rate and commodities flat, it has been a good time to be a consumer-oriented firm in India. Plus, the nation has a huge middle class that could continue to grow if growth rates stay above the 5% mark.

One targeted way to play this is via INCO, an ETF that holds about 30 Indian consumer stocks in its portfolio. The fund is a tad expensive though, as expenses come in at 89 basis points a year while bid ask spreads are relatively wide as well (read Top Three Emerging Market Consumer ETFs).

Large caps account for about 60% of the fund’s assets, while mid caps make up the rest of the fund. The product is also well split between cyclical and staples, although it does tilt towards auto manufacturers, food products, and auto parts in terms of industries.

EG Shares Index India Infrastructure Index Fund (INXX)

India is notorious for its weak infrastructure, and the government has begun to rectify this problem on a massive scale. And with sluggish commodity prices it has been even easier for governments to ramp up development in this field, making an ETF like INXX a solid pick.

The fund targets the Indxx India Infrastructure index, giving investors exposure to about 30 stocks that have big infrastructure operations in India. Once again, this fund is a bit expensive at 85 basis points a year, though its volume is slightly better (it still has a relatively wide bid ask spread though).

In terms of sectors, the fund has a nice split with 25% to utilities, 22% to industrials, and about 21% in basic materials. The product is heavy in large caps though, while it also has a big chunk of its assets in value stocks (see Time to Buy the India Infrastructure ETF).

Bottom Line

Emerging markets have been coming back in a big way over the past month, with many broad indexes beating out domestic counterparts. This is a sharp departure from what investors were seeing in the early part of the year, as many emerging market ETFs were lagging far behind U.S. stocks to start 2013.

Most impressive of all in this turnaround though was the India ETF space. Funds in this segment set the pace for the market, at least over the past month. While the gains have been broad based, a few specialized sectors—represented by INXX and INCO—have been the true stars in the country and could be worth a closer look by risk-tolerant emerging market ETF investors at this time.

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ISHARS-EMG MKT (EEM): ETF Research Reports
 
EGS-INDIA CNSMR (INCO): ETF Research Reports
 
ISHARS-SP INDIA (INDY): ETF Research Reports
 
IPATH-MS INDIA (INP): ETF Research Reports
 
EMERG-GS IIIIF (INXX): ETF Research Reports
 
MKT VEC-INDI SC (SCIF): ETF Research Reports
 
VANGD-FTSE EM (VWO): ETF Research Reports
 
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