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Despite global turmoil, US firm to launch India-focused fund

May 18, 2010 13:25 IST

The new ETF will have a portfolio of 30 cos involved in India's infrastructure sector.

Despite some debate on whether this is the best time to launch a new fund, Emerging Global Advisors, a New York-based research and asset management firm specialising in emerging markets, plans to launch the EG Shares Indxx India Infrastructure Index Fund within the next couple of weeks.
The exchange-traded fund will join a small family of funds offering exposure to India, but believes it faces no real competition. Richard Kang, chief investment officer, Emerging Global Advisors, said, "An ETF must be either first to market or sufficiently differentiated to succeed." He points out that their fund will be the first theme-specific fund among the India-focused ETFs, while the others track major Indian indexes based on large-cap stocks.

The new ETF will have a portfolio of 30 companies involved in India's infrastructure sector, from copper and cement companies to those providing transportation and movement of capital goods. It will be a passively-managed fund, tracking an index built by the New York- and Gurgaon-based firm, Indxx LLC.
But, with global markets on a roller-coaster ride of late, is this a good time to offer an India-focused product to US investors? Tom Lydon, editor of the California-based ETF Trends, says, "India is a promising market and a popular destination for investors. Providers sense the appeal and demand. They're striking while the iron is hot."

Paul Christopher, senior international investment strategist at Wells Fargo Advisors, believes it may be wise to wait. "Although India has already begun tightening policy, current interest rates remain stimulative, and with inflation pressures mounting, markets want to feel more confident that the Reserve Bank of India has inflation under control," he says.

Christopher is confident this will happen soon, foreseeing "several months now of continued volatility, during which a fund launch might seem less than successful, and a horizon beyond the near-term uncertainty, during which time macroeconomic conditions should favour the issue more."

In fact, India-focused exchange traded products have outpaced other emerging market funds this year (see box).

India-focused exchange-traded products
ETF Assets ($mn) Chg (%)*
WisdomTree India Earnings 847 5.20
PowerShares India 395 1.30
iShares S&P India Nifty 50 Index 62 10.60
iPath MSCI India Index ETN  1000 3.60
Emerging market ETFs
Claymore/BNY Mellon BRIC 970 -3.60
SPDR S&P BRIC 40 424 -2.50
iShares MSCI BRIC 940 -4.20
iShares MSCI Emerging Markets  - -1.20
Vanguard Emerging Markets - -0.30
* % change over year to date

Until recently, American investors have had little appetite for, or access to, opportunities in India. Even among emerging economies, the Indian ADR basket is not as full or as varied as those from China or Brazil. Many US investors seeking global exposure didn't venture beyond Europe or Japan. But, with those returns coming in flat or negative over the past decade, and domestic returns looking similar, there is greater interest in emerging markets.

Emerging Global's Kang points out that India is unique among emerging economies due to its companies' strength and diversity across various sectors: "If you make a sector-pie, it looks like the US or any other developed market."

However, investing in India is not without challenges. Echoing Christopher, Kang also worries that India may have been too late in raising interest rates, and that the recent RNRL-RIL dispute over gas prices might foreshadow greater government involvement in corporate disputes.

The restrictions on Foreign Institutional Investor investment are another concern, according to Dan Brown, Associate Analyst at Wells Fargo Advisors, as they increase the chances of return tracking errors, if companies on the index being tracked by the ETF reach the maximum limit available to FIIs.

Information about Indian companies is also not easily available, but Lydon argues that ETFs offer a way out: "As with investing in most developing nations, information on Indian companies can be time-consuming to look for and tough to come by - ETF providers will do the legwork for you."

The family of India-focused exchange traded products is currently small, just four; and young, the first was launched in 2006. But, with analysts seeing India as a preferred market among emerging economies and an alternative to a China-focused play, this group seems poised to expand.

Indira Kannan