Investing in India’s stock market with a single US-listed security

Photo by Shan Elahi on Unsplash

Asset management firm WisdomTree recently called India a special opportunity “beyond the U.S.” in its market outlook for the second quarter of 2024. In it, they wrote:

Standing as a beacon of growth, India’s market is not just surviving but thriving; [Wall] Street anticipates 2024 gross domestic product (GDP) growth will exceed all major economies. We anticipate forthcoming springtime election success by Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP), which promises a stable environment for further economic expansion. The underexposure of many American portfolios to India’s burgeoning economy suggests a missed opportunity for those allocators.

If you’re an investor in the US looking into buying stocks in India with ease, you will likely turn to exchange-traded funds (ETFs). With ETFs, one single investment can represent a stake in the broad market. They are often passively managed and follow an index, resulting in only a relatively small fee charged by the fund management.

ETFs significantly reduce the investor’s effort, risks, and trading costs as compared to selecting single stocks. They therefore provide an opportunity to save precious time while gaining a diversified portfolio.

— Read What is an ETF? if you want more details about what an ETF is —

However, there are many India equity ETFs to choose from (equity being a synonym for stocks, as stocks represent a company’s equity). The right or wrong choice can make a big difference in your portfolio’s overall return (which you’ll see further down).

This article compares two popular ETFs that invest in India’s stock market for you, INDA and EPI:

We’ll first look at fund properties and stats (What’s going on here?),
then interpret them (What does that mean?),
make it all relevant (Why should you care?),
and last but not least draw an action-oriented conclusion (ETF Nerd Assessment).

What’s going on here?

We’re comparing INDA and EPI, two of the most popular India equity ETFs for US investors. Let’s dive right in.

INDA — iShares MSCI India ETF

Is issued by the asset management behemoth Blackrock which owns the market-leading ETF brand iShares
Invests in the largest Indian companies by effectively accessing the top 85% of the Indian stock market (as measured by the valuation of the companies, aka market capitalization), resulting in a portfolio of 136 holdings currently
Holds Reliance Industries, ICICI Bank, and Infosys as the biggest three positions in its portfolio, with 36% of the assets concentrated in its top 10 holdings
Last reported a portfolio turnover of 18%
Costs the investor 0.65% annual expense ratio
Manages assets worth over $9 billion
Created a total return of +31.19% for its investors over the last 1 year and an annualized +8.27% over the last 10 years
Averages $4.8 million worth of shares in daily trading volume

EPI — WisdomTree India Earnings ETF

Is issued by WisdomTree, an established, independent ETF firm
Screens the profitable ones among all Indian stock market-listed companies, resulting in a portfolio of currently 475 holdings
Holds Reliance Industries, Hdfc Bank, and ICICI Bank as the biggest three positions in its portfolio, with 38% of its assets concentrated in the top 10 holdings
Last reported a portfolio turnover of 51%
Costs the investor 0.85% annual expense ratio
Manages assets worth almost $3 billion
Created a total return of +38.08% for its investors over the last 1 year and an annualized +10.26% over the last 10 years
Is traded on average with $1.1 million worth of shares daily

Research note: All information was gathered on 24 April 2024 from each fund’s official website and Morningstar.co m.

What does that mean?

Both, INDA and EPI, give the US investor access to a diversified India-only stock market investment. They are similarly invested in the largest Indian companies and both are managing assets in the single-digit billions of dollars — heavy-weights that are likely to get continued attention from investors as well as their fund management.

Both are fairly liquid issues, meaning that the average investor can buy and sell without moving the price much or incurring significant transaction costs besides brokerage commission (if any).

Pros of INDA

INDA reported a considerably lower portfolio turnover, meaning it made fewer changes in its positions resulting in a lower number of taxable events, a potential cost saver in taxable accounts
INDA costs less
INDA is more liquid, meaning larger investors may find it easier to buy and sell its shares

Pros of EPI

EPI has 3 times the number of holdings, and can therefore be considered more diversified
EPI has outperformed INDA by almost 7% over the last year, and almost 2% annually over the last 10 years, both figures after the funds’ expenses but before taxes

Total returns of INDA vs EPI since 31 Mar 2014, with dividends, as of market close on 23 Apr 2024, data and chart according to Morningstar’s website

Why should you care?

Selecting the best possible ETF for your India equity investment is key to optimizing returns and minimizing risks.

Let’s look at where an investment of $10,000 ten years ago in both of these funds would have landed today (after the fund’s expenses, before taxes and other potential fees and transaction costs). The difference is a striking $4,926.22 — almost 50% of the initial amount!

You can see it in the following chart.

$10,000 invested in INDA and EPI on 31 March 2014 would have resulted in $22,341.47 (INDA) and $27,267.69 (EPI), net of the fund’s expenses but before taxes and other potential fees and transaction costs, as of market close on 23 Apr 2024, data and chart according to Morningstar’s website

While EPI looks like the overall winner, it comes with a nuanced downside.

Analyzing the chart a bit more in detail, EPI regularly had a harder time than INDA in times of falling prices. You can observe that phenomenon especially well from the temporary peak at the beginning of 2018 until the COVID-low at the beginning of 2020.

During such times, INDA reliably outperformed EPI.

This makes sense: It is a historical fact that, over the very long term, small companies (aka small caps) outperform large “blue chips” (aka large caps) because smaller enterprises tend to have higher growth rates than large ones; coming with more volatility in small companies’ profits and stock prices and thus a higher risk for investors.

EPI allows not only the largest Indian stocks into its portfolio like INDA does but also sources from the entire stock market. That lowers the average market capitalization of EPI’s portfolio holdings. This explains its long-term outperformance over INDA with bear market phases of higher drawdown risks.

ETF Nerd Assessment

With the US stock market having outperformed most international stock markets over the last decade, it is now a good time to diversify internationally. For investors who want to put some of that shifted focus on India, e.g. for the reasons mentioned in the introduction of this article, an India equity ETF is a convenient choice.

If you’re investing for the long term, with a time horizon of 10+ years, choosing EPI seems to be the way to go because its investment portfolio regularly adds more weight to small- and mid-sized companies than INDA. That weight shift is likely to produce a bit more risk for EPI which can be expected to be rewarded by long-term outperformance versus INDA.

Think ‘and’ instead of ‘or’: For stock investors with a time horizon under 10 years, it would be an idea to mix both ETFs in your portfolio, e.g. giving INDA and EPI 50% each of the portion of your portfolio allocated to India. That way you can spread your risk more broadly, allowing for the good times of EPI to play out with INDA reducing the risk somewhat in times of market downturns.

For traders timing the market and making short-term trades within days, weeks, or months, INDA is the better choice. Its higher liquidity will reduce the trader’s transaction costs and hence enhance the bottom line.

Thanks for reading this ETF Nerd article. You are much appreciated.

Shine your light,
Cristof Ensslin

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This article is intended for residents of the United States only. Not all of the products and services mentioned on this site may be available in your state.

The information in this article is not an offer or solicitation of an offer to buy or sell specific securities. Nor is it an endorsement or recommendation of the specific securities mentioned. It does not constitute personalized investment, financial, legal, or tax advice. It is for educational purposes and general information only and presents the author’s opinions which are subject to change without notice. Research for this article was done thoroughly from sources the author believes to be reliable and trustworthy, but the author cannot guarantee that the presentation is complete or correct.

Investments in stocks, ETFs, and other securities can lose value. There is no guarantee that this information will lead to investment returns or profits. Historical results and analysis are not a guarantee for future results. Model portfolio returns may not be achievable by all investors.

Each person’s situation is unique. Please seek professional advice from the qualified financial advisor of your choice about your investment decisions, and your attorney and accountant concerning legal and tax questions.

My firm Pine Ridge Wealth LLC (PRW) is an investment adviser registered with the State of North Carolina. PRW may only conduct business with residents of the states and/or jurisdictions in which it is properly registered.

Neither PRW nor its representatives are affiliated with the fund advisors, issuing companies, or fund sponsors mentioned in this article. However, PRW and its representatives may own, plan to own, or otherwise have an interest in individual securities mentioned in this article, and may benefit from you buying these particular securities.

For further information, including PRW’s current full-disclosure brochure, see www.pineridgewealth.co m.

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