The Big Emerging Market to Consider if China Stumbles

When it comes to emerging markets investing, China looms large. It’s the world’s second-largest economy and that heft is reflected in supposedly diverse indexes and exchange traded funds. For example, the widely observed MSCI Emerging Markets Index allocates almost 30% of its weight to Chinese stocks, or more than its combined weight to Brazilian and Indian equities.

Speaking of India, it too is an enormous economy – currently Asia’s third-largest and, by some estimates, eventually the biggest in the world. More important than those data points, and they are important, is performance. India has delivered the goods for investors. Over the past three years – a period including myriad stumbles for broader emerging markets strategies – the MSCI India Index is higher by 40.3% while the MSCI China Index and the MSCI Emerging Markets Index are deeply in the red. Plus, Indian stocks were significantly less volatile than the China and emerging markets gauges over that period.

With those points and the specter of a China’s economy slumping in mind, investors might want to consider giving India ETFs a closer look.

WisdomTree India Earnings Fund (EPI)

EPI is one of the oldest India ETFs and it’s getting better with age as it has absolutely obliterated the MSCI India Index and other India ETFs over the past three years. An important point in EPI’s favor and one that likely explains some of its long-term out-performance is an index methodology that emphasizes profitability.

That reduces the number of speculative companies that appear in the ETF while serving to enhance the fund’s quality profile. Regarding quality, it’s a distinct factor from low volatility, but the former often begets the latter. Interestingly, EPI has been less volatile on an annualized basis over the past three years. Importantly, EPI is well-positioned to capitalize on India’s attractive demographic trends.

“India has a young and growing population with a median age of just under 29 years, a large and growing middle class, and a rapidly expanding skilled workforce,” according to WisdomTree research. “It also has the largest English-speaking population after the U.S., making it the preferred destination for outsourced manufacturing and services. In addition to this, the nation’s progress in enhancing literacy levels and education standards has positioned India as an emerging powerhouse of the world.”

VanEck Digital India ETF (DGIN)

Speaking of India’s alluring demographic trends, DGIN is a prime example of an ETF levered to those themes. It’s widely known that the behemoth economy is among the most technologically advanced in the world, but some of the old guard ETFs in this category aren’t adequately attuned to that theme.

Additionally, while it’s not yet on par with the U.S. or China, India’s e-commerce market is one of the fastest-growing in the world. That status is fortified by at least two pivotal points. First, India lacks the big-box retail infrastructure found in the U.S. Second, perhaps as a result of the first point, Indian consumers are comfortable shopping online, including via mobile devices.

“We’re making a bold call for India’s smartphone market. We believe it will triple in size over the next decade to $90 billion and account for 15% of global smartphone shipments by 2032, up from just 6% today. That implies that India alone will drive 100% of global smartphone shipment growth over the next decade,” observed Erik Woodring, Morgan Stanley’s U.S. hardware analyst.

Invesco India ETF (PIN)

PIN follows the FTSE India Quality And Yield Select Index, making it a dividend-based play on Indian equities. That index excludes the 10% of the lowest yielders among Indian stocks and another 10% that score poorly based on quality metrics.

That strategy seems to have long-term durability as PIN, though oft-overlooked in this category, has been around for more than 15 years. Importantly, PIN could be better positioned to capture long-term upside relative to a comparable China ETF.

“Moreover, India's ability to leverage multi-polar world dynamics is a significant advantage. Simply put, India's future looks to a significant extent like China's past, and in this context, it's particularly relevant to note long run trends in exchange rates now show the Indian rupee more stable and actually appreciating whilst the renminbi is depreciating,” according to Morgan Stanley.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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