India ETFs To Soar On Rate Cut?
The Reserve Bank of India (RBI) lowered its key rate to an over five-year low on April 5, 2016. This was the first cut in 2016 followed by four rate cuts in 2015. On Tuesday, the central bank slashed its key interest rate by 25 basis points (bps) to 6.50%, in line with the market expectations, to bolster business in the economy. The Indian stock market took giant strides in 2014 on pro-growth political changes only to lose in 2015, probably due to political deadlock. So far this year (as of April 4, 2016), most of the India ETFs are in the red, but could turn around on monetary policy easing. Not only this, the Reserve Bank of India hinted at accommodative monetary policy going forward, giving market experts reasons to see another 25 bps cut later this year, per Reuters . The move was prompted by easing inflation. Raghuram Rajan, the RBI governor, sounded hopeful of hitting the 5% inflation target for March 2017. The next target is 4.2% by March 2018. Investors who put more emphasis on slowing GDP data for the U.S. economy for the October-December quarter (7.3% followed by 7.7% growth rate in the second quarter), will now find some reason to invest in Asia’s third-largest economy. This along with stubbornly low oil prices in the global market and a relatively stable currency in the wake of a subdued greenback should propel the Indian stock market in the days to come. After all, India is heavily reliant on imports to meet its energy requirements. So, a massive drop in oil prices last year came as a boon to the economy and saved India’s significant foreign exchanges. While all India ETFs should bounce following the rate cut, below we highlight three small-cap ETFs that might get an edge over their peers. This is because small-cap stocks rebound more than the larger ones when the domestic economy picks up. These pint-sized stocks are less affected by global market turmoil than their larger counterparts. iShares MSCI India Small Cap Index Fund (BATS: SMIN ) This product provides exposure to the small cap segment of the broad Indian stock market by tracking the MSCI India Small Cap Index. Holding 236 securities in its basket, it is widely spread out across number of securities with each holding less than 1.96% of assets. Consumer discretionary takes the top spot making up for one-fifth of the portfolio, closely followed by industrials (20.4%) and financials (17.8%). The fund is unpopular and illiquid with AUM of $63.1 million and average daily volume of 17,000 shares. It charges 74 bps in annual fees from investors. The fund is down 7.7% so far this year (as of April 4, 2016). India Small-Cap Index ETF (NYSEARCA: SCIF ) This fund also targets the small cap segment and tracks the Market Vectors India Small-Cap Index. Here again, financials occupies the top position from a sector look at 28.8% while industrials and consumer discretionary round off the next two spots. The fund has so far amassed $153.8 million in its asset base while charging 89 bps in annual fees. Volume is decent exchanging more than 84,000 shares in hand a day. The fund is up 10% so far this year (as of April 4, 2016). India Small Cap ETF (NYSEARCA: SCIN ) This $19.2 million fund invests about 23% in the financial sector followed by 22.85% in the industrial sector. Technology and utilities sectors also got double-digit exposure in the fund. In total, the fund gives exposure to 74 stocks. It charges 85 bps in fees and has lost about 13.1% so far this year (as of April 4, 2016). EGShares India Infrastructure ETF (NYSEARCA: INXX ) Apart from small-cap ETFs, infrastructure stocks and ETFs will also get a boost from this move. As this sector is debt-heavy in nature, a decline in interest rates will favor it. This ETF provides exposure to 30 Indian stocks. It is pretty well spread out across components with none of the securities holding more than 5.98% of assets. With respect to sector holdings, construction & materials takes the top spot at 17.3%, followed by electricity (16.5%), mobile telecommunications (15.1%) and industrial engineering (10.6%). The product has managed assets worth $40 million and trades in volume of nearly 22,000 million shares a day. It has an expense ratio of 0.85% and has lost 2.8% so far this year (as of April 4, 2016). Original Post