3 India ETFs to Watch After China Rate Cut

Indian equity markets got a big boost recently following a surprise rate cut last weekend by the Chinese central bank. The People's Bank of China (:PBOC) cut the one-year benchmark lending rate by 40 basis points to 5.6% and the deposit rate by 25 basis points to 2.75%.

This is the first rate cut by the Bank of China in more than two years and has raised hopes that it might trigger a fresh cycle of aggressive policy measures by the country to fight dwindling growth. China’s growth rate has been faltering lately, with its economy expanding by 7.3% in Q3, the lowest in more than five years.

Simultaneously, the European Central Bank (:ECB) President Mario Draghi also surprised the markets by declaring his firm commitment to fight deflationary pressures in the Euro zone by bringing about more stimulus measures (read: China ETFs in Focus on Surprise Rate Cut).

Indian Market Reaction

The surprise rate cut by China and the positive commentary by the ECB led India’s benchmark indices – Sensex and Nifty – to touch new highs on the first trading day of the week. The measures have raised hopes that cooling inflation in India might also prompt the Reserve Bank of India (RBI.TO) to ease its monetary policy ahead of the policy review due December 2 to spur economic growth.

The RBI has held the repo rate steady at 8% after raising it three times from September 2013 through January 2014 to fight inflation. However, consumer inflation in India has eased to a five-year low of 5.52% in October from a high of 11.16% seen in November 2013.

India’s Finance Minister also believes that a rate cut would provide a “good fillip” to the economy. Moreover, there are high hopes that Prime Minister Narendra Modi's government would bring about big-bang reform measures in the winter session of the parliament, which has kicked off on November 24.

Given the elevated hopes of a rate cut from the central bank and reform measures from the Indian government, Indian ETFs have been performing quite well lately.

Below we have highlighted three India ETFs which might get a boost if the RBI does join the band of countries opting for easy monetary policies to fuel growth.

This fund tracks the Market Vectors India Small-Cap Index, holding 94 securities in its basket (read: India ETFs: Best of the BRICs Now?).

Market Vectors India Small-Cap Fund (SCIF)

This fund tracks the Market Vectors India Small-Cap Index providing exposure to a basket of 102 small cap Indian companies. The product is well spread out across each component as each single security makes up for less than 3.7% of assets.

From a sector look, financials and consumer discretionary take the top two spots with 27.4% and 22.5% share, respectively, while industrials and information technology make up for the next two spots.

The fund has so far amassed $281.9 million in its asset base while charging 93 bps in annual fees. SCIF has a Zacks ETF Rank of 2 or Buy rating with a High risk outlook (see: all the Emerging Asia Pacific ETFs here).

S&P India Nifty Fifty Index Fund (INDY)

INDY is a large cap centric fund that follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. The ETF has amassed $724.4 million and trades with moderate volumes of roughly 340,000 shares a day.

The fund currently holds a small basket of 53 stocks and is highly concentrated in its top five holdings. With respect to sector holdings, banks and software take the top two spots at 22.6% and 14.7%, respectively, while others make up single-digit allocations.

The fund charges 94 basis points as expenses and currently has a Zacks ETF Rank #1 or Strong Buy rating.

EGShares India Infrastructure Index Fund (INXX)

This fund provides exposure to the growing infrastructure corner of the broad Indian market by tracking the Indxx India Infrastructure Index. The fund holds a basket of 30 stocks with BhartiAirtel, Idea Cellular and Tata Motors as the top three holdings. From an industry look, industrials take the top spot with 36%, closely followed by utilities (19%) and telecom (15.7%).

The fund has accumulated just $22.1 million in its asset base and trades in small volume of 30,000 shares a day on an average. The expense ratio comes in at 0.85%.

Though INXX is unpopular and expensive, the product has gained about 13.8% post-election results and 34% year to date. The fund has a Zacks ETF Rank of 2 with a medium risk outlook.

Bottom Line

Any rate cut by the RBI in its next policy review is expected to fuel a rally in the above mentioned ETFs.

However, a group of banking and rating organizations polled by Business Standard lately are of the view that the RBI is unlikely to ease rates in its next monetary policy review this December but might consider raising it in April next year (read: Yet Another Reason to Buy India ETFs Now).

If that happens, we might see some kind of profit booking in the above mentioned ETFs. Nonetheless, long-term investors can still consider the above mentioned products, given the improving fundamentals of the Indian economy. Moreover, all of the above ETFs have a solid Zacks ETF Rank worthy of one’s portfolio.

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