INDA: iShares MSCI India ETF
The iShares MSCI India (BATS: INDA) exchange-traded fund (ETF) tracks
the performance of the MSCI India Index, which measures the investment
results of Indian equities with market capitalization that represent the
top 85% of firms of the Indian stock market. The fund employs a passive
indexing approach and does not trade stocks to benefit from equity
market swings. Since its inception in 2012, the fund has demonstrated an
average annual return of 5.83%.
The Indian economy has demonstrated economic growth from 7 to 8%, which
is much higher than the global average of about 3 to 4%. India is
expected to continue to show a high economic growth rate, which should
benefit performance of the Indian equities market and INDA in
particular. The equities in the benchmark index include stocks from
consumer staples, energy, financials and technology sectors. The market
cap profile of the underlying index includes predominantly large- and
mid-capitalization companies with strong brand presence and name
recognition in India and abroad.
How It Tracks It
All of the fund's holdings are exclusively invested in equities traded
on Indian stock exchanges. As of August 2015, INDA holds 71 Indian
stocks primarily concentrated in the information technology sector with
22% allocation. Many IT companies in INDA's portfolio cater to the
global markets with the emphasis on exporting their services to
developed countries. Financials and health care companies account for
15.7 and 12.3%, respectively. Other sectors such as consumer staples and
energy have 11.5 and 9.8% allocation in INDA's portfolio.
The fund's holdings are somewhat concentrated on Infosys, Ltd., a global
and well-known information technology company, which has 10.6%
allocation. The fund's top five companies account for 36.5% of INDA's
invested assets and include Indian companies, such as Housing
Development Finance Corp., Tata Consultancy Services Ltd., Reliance
industries Ltd. and Sun Pharmaceutical Industries Ltd. The top 10 INDA
holdings have about 52% allocation.
Due to its superior representative sampling strategy, the fund has
tracked the MSCI India Index very closely with a tracking error below
0.6% since its inception. The tracking error primarily arises as a
result of the fund paying transactions costs on trades of its holdings,
using a sample approach for constructing its portfolio and incurring
various fees and expenses necessary for the fund's day-to-day
operations.
Management
INDA was started on Feb. 2, 2012 and is managed by BlackRock Fund
Advisors. The fund belongs to a broader iShares Emerging Market ETFs
group. BlackRock Fund Advisors is a subsidiary of BlackRock, Inc., which
is highly reputable and one of the largest investment management
companies in the world with assets under management (AUM) in excess of
$4.5 trillion.
Characteristics
The fund's holdings have a price-to-book (P/B) ratio of 2.97, which is
slightly higher when compared to the U.S. equities market due to higher
expected growth in earnings. The fund has a very low portfolio turnover
ratio of 22%, which compares very favorably to 55% for ETFs in the same
category. The fund's expense ratio is 0.68%, which makes INDA one of the
cheapest funds offering exposure to Indian stocks. The fund's manager
often engages in lending INDA's securities, which earns income for the
fund later rebated to the fund's investors and lowers INDA's expense
ratio. INDA is traded on the BATS Exchange, and investors can purchase
the fund's shares through numerous investment brokers.
Suitability and Recommendations
After the Indian economy was liberalized and opened to foreign capital,
India was able to demonstrate economic growth above the global average.
Between 2005-2014, the gross domestic product (GDP) of India grew by 7
to 8% on average, which greatly benefits its stock market performance.
Also, the election victory by the Bharatiya Janata Party brought renewed
hope for further liberalization and deregulation of the economy to
speed up India's economic transformation. Investors should pay attention
to new legislation and government actions by the Bharatiya Janata Party
and assess the impact on INDA's portfolio.
Yet, the Indian economy remains highly bureaucratized, and corruption is
widespread in the country. Due to the country's stringent labor laws,
many large companies with strategic importance to the Indian economy are
restricted by the government to lay off workers, which may prove
detrimental at times of economic downturn. Also, the Indian economy is
highly dependent on imports of energy sources. The decline in oil prices
proved to be an economic boon for the country. However, if the energy
prices start rising again, the Indian economy may begin to face
rising inflation and large energy bills in the future.
For investors who follow modern portfolio theory (MPT), INDA is most
appropriate for the growth investment strategy, given the high economic
growth demonstrated by the Indian economy. As the fund invests in Indian
local currency and does not hedge its foreign currency risks, investors
are subject to currency risk, and U.S. dollar-denominated returns may
be lower as a result of Indian rupee depreciation in the future.
INDA and the Indian equities market in general have demonstrated a very
high volatility compared to the U.S. market. The three-year standard
deviation of the fund is 19.37%, which is substantially higher than
8.55% for the S&P 500 Index. The fund's three-year average annual
return is 12.25%, which is also much lower than the 17.4% return on the
S&P 500 Index, making INDA's Sharpe ratio of 0.69 lower than the
S&P 500 Index's Sharpe ratio of 1.93.
INDA is most suitable for investors who are interested in obtaining
exposure to emerging market equities and want to have focused holdings
on Indian equities. Due to a lot of volatility demonstrated by the
Indian stock market, investors should have high risk tolerance.
How Financial Adviser Clients Could Use This ETF
Financial advisers can recommend INDA as a valuable addition to their
clients' portfolios to gain exposure to emerging markets equities with a
sole focus on Indian stocks. Because the fund is nondiversified and
focuses on a single country, financial advisers should recommend their
clients include other ETFs with a focus on other countries to have
balanced and diversified portfolios.
The fund's returns have been subject to heightened volatility due to
volatile foreign capital flows in and out of the Indian stock market and
political uncertainty during the most recent parliamentary elections.
Financial advisers should caution their clients about INDA's volatility
and not recommend this fund for highly risk-averse investors interested
in stable and nonvolatile returns.
Main Competitors and Alternatives
There are a few alternatives to INDA. The WisdomTree India Earnings fund
invests in Indian stocks with a higher concentration on the financials
sector of the Indian economy. The fund also invests in technology,
energy and consumer cyclicals stocks and has an annual expense ratio of
0.83%, which is somewhat higher compared to INDA.
The PowerShares India ETF is another alternative that invests in Indian
stock with a similar focus on the technology, energy and financials
sectors of the Indian economy. The fund has an expense ratio of 0.83%.
The Market Vectors India Small-Cap fund is another option with a niche
investment strategy of holding small-cap Indian stocks. The fund's
holdings are highly concentrated on consumer cyclicals financials stocks
and target companies that cater predominantly to local consumption.
This ETF has an expense ratio of 0.89%
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