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Thursday, January 13, 2011








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[«] Money and Markets 2010 Archive View This Issue On Our Website [»]
ETFs for the FASTEST Growing Emerging Markets
by Ron Rowland

Dear Subscriber,

Ron Rowland

Pop quiz time! Name a country that has:

•  More than a billion people ...

•  A massive domestic economy ...

•  A wealthy aristocracy and rising middle class ...

•  Huge and growing exports, and ...

•  Nearly a dozen ETFs to help you gain access?

Did you say China?

Actually, I'm referring to India.

Asia's "other" mega-state isn't as familiar to most U.S. investors. But that's a shame — Indian stocks represent an amazing long-term growth opportunity.

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India: A Sub-Continent with Its Own Ocean

This isn't a new opportunity by any means. The saga begins more than a half millennium ago — when European explorers stumbled into North and South America. They weren't looking for a New World. They wanted to find a shortcut to India.

At the time, India was not a single nation but rather many diverse kingdoms and city-states. British colonization eventually unified the region and left a legacy that is now a key advantage: The English language.

Now, after decades of slow growth since its independence in 1947, India has grown into one of the world's largest and most dynamic economies.

India is now among the most dynamic emerging market.
India is now among the most dynamic emerging market.

Until recently, U.S. investors faced many practical difficulties investing in India's growth. Now, they often feel like they have the opposite problem: Too many choices!

I count 11 exchange-traded products dedicated to India. And that doesn't even include the many emerging market and BRIC products in which India is a key component.

Here is a quick rundown of the India-specific choices for ETF investors ...

Broad-Based India Equities

If you're just now exploring India or you want quick access to a cross-section of the local markets, take a look at one of these:

iPath MSCI India ETN (INP), introduced in 2006, was the first exchange-traded product to focus on India. Today it is still the largest and most actively traded.

INP is based on a good blue-chip benchmark, but I have two problems with it. First, it is an ETN, not an ETF, with all the question marks of this hybrid legal structure. Second, INP has a relatively high annual expense ratio of 0.89 percent. So I'd favor the others ...

iShares S&P India Nifty 50 (INDY) and PowerShares India (PIN) are two other large-cap India stock funds. INDY has a somewhat more concentrated portfolio than the others, which can help with liquidity but also adds to an already-high risk profile.

WisdomTree India Earnings (EPI) draws from a similar universe of stocks, but uses a different strategy to weight its holdings. Rather than allocate based on each stock's market capitalization, EPI uses WisdomTree's proprietary earnings-weighting strategy. Result: Companies that are more profitable get a bigger slice of the pie.

Specialized India Equities

With the blue chips covered, ETF sponsors are now rolling out products that cover narrower slices of India's stock markets.

India's infrastructure needs are growing fast.
India's infrastructure needs are growing fast.

EGShares India Infrastructure (INXX) holds a portfolio of India-based stocks from the utility, construction, and materials sectors. INXX came out in August 2010 and initially had a nice run-up. Since then it has pulled back.

Both small caps and emerging markets like India can be volatile. But if you want to have both in the same package, look at Market Vectors India Small-Cap (SCIF) and EGShares India Small Cap (SCIN). They've had very similar performance.

Leveraged and Inverse India

Direxion offers a pair of ETFs that track the Indus India Index (which is also the basis for PIN) with 2x daily leverage. Direxion Daily India Bull 2x (INDL) is the long version and Direxion Daily India Bear 2x (INDZ) is the short version.

Like all leveraged and inverse ETFs, INDL and INDZ are best used as short-term tools by traders who are accustomed to moving quickly. As I've discussed before, the leverage factor in these ETFs can vary dramatically for periods longer than one day.

Indian Currency

As with all international investments, it always pays to keep in mind the impact of exchange rates. The Indian rupee moves up and down in response to many factors.

Market Vectors Indian Rupee/USD ETN (INR) and WisdomTree Dreyfus Indian Rupee (ICN) both offer direct exposure to the rupee. I prefer ICN because it is more actively traded, and it avoids the credit risks that are inherent in the ETN structure.

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Best wishes,

Ron


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