FLIN - The Best India ETFs To Buy In 2023

2023-09-28 16:14:56 ET

Summary

• India is the fastest growing large emerging market on relatively favorable terms with the US, and so is attracting investors.
• India currently makes up about 18% of broad emerging market ETF allocations, and India-specific ETFs help investors isolate India exposure.
• In this article, I compare some main US-listed India ETFs as of late 2023, considering which is best for which type of investor.
• The iShares MSCI India ETF is by far the biggest and most traded, while Franklin's FTSE India ETF has a much lower 19bp expense ratio.

This year, India surpassed China as the most populous country in the world , and has continued to show strong economic growth . These positive reports, and general optimism about India being the fastest growing large emerging market on friendly terms with the United States, probably explain why India now has a CAPE ratio of 32.2, the highest of any market tracked by Barclays. By contrast, the US CAPE is 30.8, Europe's is 19.8, and China's a mere 11.4. For investors bullish on India and undeterred by these expensive-looking valuations, now is a good time to review the question of: which are the best India ETFs to buy now?

I last reviewed the list of the 11 then-available India ETFs five years ago in 2018, and was surprised to see when I looked at the "India Equity" Asset Class & Sub-Class on the Seeking Alpha ETF screener , that there still seem to be only 11 US-listed India ETFs, but with some of the old ones gone, and some new ones launched since. In this article, I wanted to start with a comparison of the two largest ETFs, the iShares MSCI India ETF ( INDA ) and WisdomTree India Earnings Fund ( EPI ), and then compare some other nine to these two to see which are the best for investors to consider this year.

India in Broad Emerging Market Funds

Before diving into India-focused funds, it is worth looking at India's position in the wider world of emerging markets and emerging market funds. India currently makes up 18.7% of the largest emerging market ETF, the Vanguard FTSE Emerging Markets ETF ( VWO ), and this 18.7% of the almost $100 billion in VWO assets is alone many times more than all the India-only ETFs here combined. VWO is also on my map of the best Vanguard funds to buy in 2023 , and I recommend reviewing that for readers seeking a higher-level re-evaluation of where emerging markets fit in a portfolio. Second after VWO is the almost $70 billion iShares Core MSCI Emerging Markets ETF ( IEMG ), of which 17.2% is in India. VWO and IEMG have relatively low expense ratios of 8 and 9 basis points respectively, so will be significantly cheaper ways for passive allocators to include some exposure to India if you're happy letting the index decide that allocation for you.

The Big 2: INDA vs. EPI

We start with INDA and EPI because they are currently the only two US-listed India ETFs with over $1 billion in assets. EPI is the older of the two, and despite having "earnings" in its name, seems to have very similar top holdings, and until last year, very similar total returns to INDA.

This past year was the first major divergence I've seen in INDA's vs. EPI's returns, and when I looked into it, the results weren't what I expected: EPI has significant positions in energy and utility stocks that INDA does not, namely Coal India , and Oil and Natural Gas Corporation , which are both up over 50% in the past year. This makes some sense if we expect EPI to be more focused on earnings, when considering the push that BlackRock and MSCI have been making against fossil fuels in recent years, but I'm not sure how sustainable this difference in returns will be going forward.

EPI is notably more expensive than INDA at 84 vs. 64 basis points, and I would only pay up for this if I were convinced that EPI's earnings weighting would make a significant enough difference going forward to overcome this 20bp spread many times over. Unfortunately, I see EPI as hugging INDA too tightly in most cases, with last year being the exception, so would prefer INDA as the winner of the "big liquid trading vehicle" category for its size, volume, and lower cost than EPI.

Two Older India ETFs: PIN and INDY vs. INDA

The first and oldest US-listed India ETF is actually the Invesco India ETF ( PIN ), launched in 2008, followed by the iShares India 50 ETF ( INDY ) launched in 2009, three years before INDA. On a 5-year rolling basis, the difference in returns can be several percentage points at times, but not enough to say one clearly has a better risk-managed India portfolio than the other two. The reason I consider INDA still the winner here is that it surpassed PIN in average trading volume back in 2015, and since then PIN and INDY have been averaging trading volumes less than 1/20th that of INDA.

Indian Small Caps: SMIN vs. INDA

I have long believed in the importance of overweighting small caps, especially small cap value , and was glad to see BlackRock launched the iShares MSCI India Small-Cap ETF ( SMIN ) within months of launching INDA. I used to own some SMIN, but then sold it to buy emerging markets value funds, because I got frustrated with SMIN's lack of any valuation or profitability filter. That said, in SMIN's relatively short 11-year run so far, it has delivered a significant small cap size premium over INDA, and I expect the pattern of SMIN falling more on dips and rising more longer term to continue over time. Like China or Korea, I expect India's small cap market to be very inefficient and full of mispricing opportunities, and I only wish there were better small cap funds or direct access for me to trade these shares.

India's Low-Cost Index Fund: FLIN vs. INDA

One of the ETFs I reviewed back in 2018 that I am glad to see is still around is the significantly lower expense ratio Franklin FTSE India ETF ( FLIN ), which charges only 19 basis points in contrast to INDA's 64. FLIN's assets and volumes are still significantly lower than INDA's, but seem to be steadily growing, and should be plenty sufficient for a Vanguard-style buy and hold investor who wants to add a little more India allocation without significantly adding costs, and who doesn't care about active trading. A minor advantage of FLIN in a portfolio with VWO is that both use FTSE benchmarks, so there is also the consistency in index methodology for that type of portfolio.

India's Biggest Sector Fund: INCO

One last ETF I'll comment on here is the one India ETF with over $100 million in assets that explicitly targets the Indian consumer, rather than banks or utilities, and that is the Columbia India Consumer ETF ( INCO ). INCO actually holds even less in assets than it did five years ago when I last looked at it, even though its performance has actually not been too bad. INCO's single largest holding is 12.2% in Nestle India, which is a stock I like enough and have a hard enough time accessing that I'd be tempted to buy INCO just for that, but looking at INCO's other holdings and 75bp expense ratio, I'll just stick with the India exposure in my Nestle stock ( NSRGY ) for now instead.

Conclusion

I currently own none of these ETFs for one simple reason: I find the broad Indian stock benchmarks expensive at the moment, especially the banks. If I had to do a long-term buy and hold allocation to India, I would prefer to use FLIN for its low cost, while if I were more actively trading, I would prefer to use INDA. My single largest exposure to India is through a direct position in Infosys Limited ( INFY ), followed by Tata Steel ( TATLY ), and after that, the India exposure I have through my shares of NSRGY and Unilever Plc ( UL ) is more transparent to me than having a small portion of something like INCO in my portfolio. I certainly wish it were easier for foreign investors to directly access Indian shares, as we have been able to do in China for many years , but until then, we have INDA, FLIN, and ADRs like INFY to keep us busy.

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