Quite a few significant changes have taken place in India since I last covered the flagship US-listed India tracker fund, iShares MSCI India ETF (BATS:INDA) (see INDA: Brace For India’s Post-Election Upside). Top of mind is last month’s general election, which saw Prime Minister Narendra Modi and his ruling National Democratic Alliance (or “NDA”) coalition return to power (expected), albeit with a smaller majority than before (unexpected). Still, the broader point is that the “Modi 3.0” Cabinet will feature the same faces as “Modi 2.0” – a decidedly market-friendly outcome, as the post-election rally showed.
The other big development is that foreign investors have returned (with a vengeance) post-election. Having been net sellers pre-election, recent flow of funds data showed a staggering ~$4bn of foreign inflows since June.
This has naturally raised “FOMO” (“fear of missing out”) concerns, particularly with MSCI India re-rating to a seemingly pricey ~24x forward earnings. Superficially, concerns seem valid enough, especially when you benchmark valuations against earnings growth pacing at +11% this year. Against last year’s +31% growth, on the other hand, you could even make a case that Indian large caps are cheap. In both cases, context is important – after all, this year’s earnings are bumping up against a very high margin base sans last year’s commodity tailwinds.
More important, in my view, is where Indian large-cap underlying earnings power is trending. In this regard, consensus large-cap numbers for 2025 and beyond show 1) a sustained mid to high-teens % earnings growth and 2) a high-teens % (and rising) return on equity (sans debt).
Both of these factors are sufficient by themselves to support some very big multiples. But add to that a cost of capital tailwind from India’s upcoming sovereign bond index inclusions, thereby allowing corporates future access to an abundance of lower-cost capital, and you have a great setup for long-term shareholder value creation. No surprise, then, that foreign funds have no qualms chasing Indian large-caps at the current ~24x forward P/E, with INDA continuing to lead the way as the go-to India play.
INDA Overview – Over $1.5bn Larger and Highly Liquid
Policy-wise, the iShares MSCI India ETF, which tracks the all-important MSCI India index, is mostly status quo. The big change, however, is that INDA is bigger than ever – at ~$11.4bn, INDA has added over $1.5bn to the $9.7bn it managed when I covered the fund last quarter. Spreads aren’t any narrower, but you’d expect that, given the bid/ask was already at a best-in-class ~2bps. Being the largest and most liquid ETF is a big advantage from an execution perspective, so even though the manager hasn’t compromised on fees (0.65% expense ratio vs. 0.19% for the lowest-cost Franklin FTSE India ETF (FLIN)), investors moving larger volumes will still find a lot to like here.
INDA Portfolio – Still the ‘Middle Ground’ Large-Cap Option
At the sector and single-stock level, INDA’s portfolio composition is broadly unchanged. The biggest sector exposures are, in line with last quarter, Financials (24.6%) and Consumer Discretionary (12.9%). Similarly, INDA’s staple single-stock holdings, comprising Reliance Industries (RLNIY) (7.9%), ICICI Bank (IBN) (5.2%) and IT services leader Infosys (INFY), remain intact.
On a relative basis, the selling point for INDA remains its ‘middle ground’ approach to portfolio construction. By comparison, the increasingly popular FLIN maintains a broader 232-stock portfolio (vs. 146 for INDA), while iShares’ Nifty 50 index tracker, the India 50 ETF (INDY), has 50 stocks. Beyond the obvious portfolio sizing implications, INDA is also priced in between both funds (on trailing earnings). Hence, INDA remains a great fit for the more strategy-agnostic investors out there.
INDA Performance – Middling Returns; Best Tracking Error
INDA’s strong returns over the last year have been very much in line with prior pre-election trends. Indian equities tend to perform strongly post-election as well, so it’s not too surprising to me that INDA’s year-to-date return is already at +16% NAV. Zooming out, INDA has now compounded at a higher +10.3% and +11.2% pace over the last three and five years, respectively.
On a relative basis, on the other hand, INDA isn’t the best-performing fund. Among the conventional trackers, FLIN, despite its shorter track record, stands out here, while quality-focused Invesco India ETF (PIN) has outperformed both INDA and FLIN across all relevant timelines.
Where INDA leads, though, is its consistently best-in-class tracking error (i.e., the gap between fund and benchmark returns) – arguably the “bread and butter” of an index fund manager. Note that this metric is particularly important in India, where foreign investors are subject to high transaction costs and capital gains taxes (accrued in fund NAV calculations), among others. In a world where giving up over four percentage points (FLIN) to high-single-digits % (PIN) was the norm last year, INDA’s 2023 tracking error of slightly over three percentage points stands out. Regulatory treatment of foreign capital likely isn’t going to improve anytime soon, so those who favor accuracy over speed should continue to find plenty to like with INDA.
Keep Calm and Stay Long India
India’s post-election rally is now in full swing and justifiably so, in my view, given the compelling macro/micro setup at hand. From here, all eyes will be on this month’s budget, where confirmation of policy continuity, and potentially even some consumption-boosting surprises now that the government has a little more fiscal space, could unlock more near-term upside. Coupled with some very solid corporate fundamentals and a foreign investor-led flow of funds boost, INDA’s investment case still appears very compelling – even at a re-rated forward P/E.
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