Emerging Global exchange traded funds give US investors exposure to India

US-based Emerging Global Advisors is introducing two new India-themed exchange traded funds (ETFs) on the New York Stock Exchange (NYSE).

The funds will track India’s small-cap and infrastructure sectors, Richard C Kang, chief investment officer and director of research at Emerging Global Advisors, told DNA Money.

The EG Shares Indxx India Small Cap ETF (NYSE ticker: SCIN) will track the small cap sector. “SCIN, to be launched on July 7, is the first ETF focused on India’s small-cap sector and will have 75 holdings. In general, small cap has outperformed large cap in Indian equities,” said Kang.

Analysts say year-to-date small cap is outperforming large cap Indian equities by a margin of 2-1.

Kang said he liked India’s small-cap sector as it relied on domestic demand.  “Small businesses rely on the Indian consumer. Typically, this Indian consumer is someone who has been saving assiduously over the years. He has savings to buy his first TV or phone. In contrast, large-cap companies like Infosys rely on over-spent consumers in Europe, Japan and the US who are now cutting up their credit cards and halting spending.”

The second ETF, to be launched later this summer, would be called the EG Shares Indxx India Infrastructure Fund (NYSE ticker: INXX). It would have a portfolio of 30 companies involved in India’s infrastructure build-out. According to Kang, ETFs were tailor-made for risk-shy American investors wading back into emerging markets seeking higher yields.

“If the ETF is the best instrument of gaining exposure, the current environment suggests broad emerging market exposure is sub-optimal —- investors should be selective. As investors would rotate among sector funds or ETFs for US equity asset class exposure based on their views of the economic cycle, the same logic would resonate for emerging market exposure,” said Kang.

“The theme of infrastructure plays off the growing middle class demographic in China, Brazil and India which absolutely needs and wants to join the modern world and that can only be done with the basics —- infrastructure.”

Going global is a good, sensible theme for 2010 and some of the best bargains lie outside the US in markets like India that have been less picked over by professionals, said Kang. India was attractive because it had an expected GDP growth of 7-8% in CY 2010 while developed markets had been growing at around 2%.
If the BRICs represented a family of emerging markets, India is the “oft-ignored middle child,” he said.

“India has been the most overlooked of the BRIC nations. Like China or Brazil, India too has a large population that is young, well educated and entrepreneurial. There are over 20 China-focused ETFs in the NYSE. India has four, and ours on Wednesday will be the fifth. Given India’s potential, we wonder why it doesn’t have 10 or 20 ETFs.”

“Is India’s economy good? In fact, India’s economy is too good. That is why the Reserve Bank of India has had to raise interest rates twice since March to tame inflation as the economy has been expanding rapidly. Historically, the inflation is not too bad, but as the overall climate is deflationary, it looks too strong. India has $2 trillion in debt, but for most other measures, it is a healthy economy. Its forex and gold reserves are $287.5 billion, and the savings rate is 35% of GDP, with an investment rate of 32.1% of GDP, including a good chunk for infrastructure.”

An investors’ survey for Bloomberg BusinessWeek found that 40% of American investors plan to increase their exposure to international stocks over the next five years, up from 22% a year ago. Exchange traded funds focused on India are likely to flourish as fund managers like Kang look East.