Cracking the Indian market: ADR vs ETF
U.S. investors are often frustrated at the disparity between the economic realities of India and the opportunities they have to get exposure to that market story. On one hand, we are constantly bombarded with evidence that India is one of the biggest economic development stories of all time, with a vast industrial presence, a significant domestic energy industry and a thriving consumer market.
Overly weighted to tech But based on the companies that have pursued listings on Wall Street, you'd barely know the country did anything but IT support. Indian ADRs have $110 billion or so in aggregate market capitalization and technology companies -- everyone from giants like INFY and WIT (quote) down to REDF -- account for about $49 billion of that.
There is a lot of growth in Indian IT, but the sector only really accounts for around 8% of the economy. Why do IT companies get 44% of all the Indian ADR market cap? Part of the answer is cultural. Unlike the gigantic quasi-government enterprises like ONGC (the Indian Oil & Gas Company) and State Bank of India, the tech companies incubated according to a more entrepreneurial model.
When it was time to grow, they went to the capital markets, and at the time Wall Street was the hot place to launch an offering. Meanwhile, the gigantic family-owned conglomerates like Reliance Industries rarely went to foreign markets for capital because it just was not necessary. Likewise, the gigantic state companies stayed at home, slowly auctioning off bits of their equity to local investors.
As a result, even if you constructed a portfolio out of all 16 Indian ADRs, you might be getting some great companies, but you would still only be getting exposure to 8% of the $1.2 trillion Mumbai market. You would miss out on utilities, steel, mining, oil, coal, consumer products, retail, most banks and most of the country's biggest telecom companies -- just for a start.
Other distortions That 8% exposure is also surprisingly oriented toward the mid-cap side of the Indian market. Out of the top 30 Mumbai-listed companies -- the "Indian Dow," if you will -- only four have ADRs: technological superpowers INFY and WIT along with banks HDB and IBN.
Once again, you can buy the ADRs, but you will miss out on 86% of the total weight of these 30 companies. Between them, these big names account for half of all Indian market cap, so do not be surprised if your ADR portfolio fails to correlate all that well with the Mumbai indices. Last thing to remember: Simply having an ADR does not mean that a company is the leader in its home market. It just means that, for whatever reason, management opted at some point to pursue a U.S. listing.
Tata Motors TTM is a great company, but it is not India's biggest car maker. Dr Reddy's RDY has a compelling pharma model, but is not India's biggest drug company. SLT is not the biggest miner and MTE is not the biggest phone carrier.
What these companies have to offer is accessibility, and you will probably pay a premium for that.
The ETF approach
Of course, if you like one or more of these companies, it should have a role to play in your portfolio. But if you are looking for that other 92% of the Indian stock market -- or if you just want returns that are more closely correlated to the SENSEX -- then it may make sense to start with a broad ETF and build additional positions in a favorite company around it.
INP (quote) has the broadest portfolio but it is heavily weighted to U.S.-listed names. PIN may be a better reflection of what is really happening in India. ADRs only account for 24% of the portfolio.
Of course, ADRs have their advantages. Look at how much more volatile PIN is. But if you want real exposure to the Indian story, somewhat sharper declines are the price you pay for (we hope) those steeper peaks.