India could be on the verge of its own 1980's-style decade --- minus the shoulder pads and bad hair. After years of the Gandhi family dynasty’s socialism leading to slow growth, poverty and dependency, new pro-reform, pro-business prime minister Narendra Modi has been elected in a landslide, with a majority rule in the government. Some articles compare him to Ronald Reagan and recall the 1980 election when Reagan defeated Jimmy Carter and kicked off one of the greatest economic expansions in U.S. history.
Investors are betting that the world's third-largest economy will have a bright future under the new regime. India ETFs have rallied top to bottom this year and all of them popped on the May 16 election news. Adding to the optimism is India’s recently appointed central bank head, Raghuram Rajan, a former economist at the International Monetary Fund and inflation-fighter, which we covered here last year. In other words: He's Modi’s Paul Volcker.
Aggressive investors can find ETFs well positioned to play India’s local economy, and without doubling up on holdings in big emerging markets ETFs and mutual funds. It's important to note that much of the election is likely priced into India ETFs, with many of them up over 20 percent for the year to date.
Market Vectors India Small-Cap Index ETF (SCIF)
SCIF tracks 88 small-cap stocks, which are more tied to the local economy than are large-cap multinationals. SCIF is the best-performing India ETF so far this year, with a return of 31 percent. Investors should expect a bumpy ride; SCIF has about double the volatility of the S&P 500 Index. The ETF charges 0.85 percent of assets on an annual basis, which is about average for the dozen India ETFs available. SCIF's assets have doubled this year, to $256 million.
EGShares India Infrastructure Index Fund (INXX)
INXX tracks 30 Indian infrastructure companies. The country's infrastructure ranks as one of the worst in the world -- worse than Kazakhstan, Cambodia and Kenya, according to the World Economic Forum. INXX has rallied the most of the India ETFs -- 16 percent -- since May 8, when it became increasingly clear Modi could win the election with a strong mandate. It has only $22 million in assets and an average daily volume of 41,000 shares. Investors should be mindful of trading costs and use a limit order.
WisdomTree Indian Rupee Strategy Fund (ICN)
ICN tracks the changes in the Indian rupee relative to the U.S. dollar, using currency forward contracts. The ETF is up 8 percent this year, which makes it the second-best performing currency ETF in the world. The top-performer is the WsidomTree Brazilian Real Strategy Fund.
The rupee’s rally is largely due to India’s central banker raising interest rates to stem inflation. Short-term rates at 8 percent are attractive to foreign investors and create demand for the rupee, which will increase its value. ICN allows you to play Rajan’s stated policy and collect an 8 percent yield. The ETF charges 0.45 percent and has $28 million in assets.
More stories by Eric Balchunas:
- Assets Pour Into a Curious and Controversial Investment
- Two New Emerging Market ETFs to Write Home About
- Choosing 'All of the Above' in Your Income ETF
- Did Al Gore Invent ETFs, Too?
- Your New Financial Adviser: Radiohead
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