With Indian regulators clamping down on derivates contracts from outside markets, the only exchange-traded note [ETN] providing direct access to U.S. investors has been in a stop-and-start mode issuing new shares. As a result iPath MSCI India ETN (INP) isn't acting like an open-end vehicle. Late last year, the ETN's price was trading at around a 20% premium to its net asset value. Even after this year's negative 16% return, it's still selling at a premium. Retail investors in the U.S. are about to get a second option. In early February, WisdomTree Investments plans to launch the WisdomTree India Earnings ETF.
The ETF's benchmark includes 150 locally listed companies. That compares to around 62 companies the MSCI Index tied to the iPath uses. The WisdomTree India Earnings Index also screens for profitability as a criteria. "We only include Indian companies that've been profitable in the last reported 12 months," Lavine said. Stocks are weighted in the index by "their contribution to the earnings stream of corporate India," he added. "We look at trailing net income and work with S&P in those calculations."
The rival ETN is market-cap size weighted. "The Indian market has been soaring for years now," Lavine said. "Our fund gives investors an ability to buy into India at a lower price-earnings ratio and in a more diversified underlying index." The fund will trade on the NYSE Arca under the symbol "EPI." Its expense ratio will be 0.88%, which will serve as the ETF's permanent cap as well. That's slightly less than the iPath's 0.89% expense ratio.
"Another key is that this fund has a level of certainty in regards to taxation as you see with other ETFs," he said. "We won't use any derivates, or participatory notes, in our ETF." Use of derivates was a key sticking point for Indian authorities in their efforts to slow the flow of "hot money" by foreign investors into one of the world's fastest-growing economies.
Advisor Newcomb agrees, pointing to recent tax rulings that make ETNs less attractive than ETFs under certain situations. "There are some closed-end vehicles covering India," he said. "But they've got less transparency than an open-end ETF and you've got to juggle the premium-discount swings. That can be a real problem at times."
Update: Powershare joins the India ETF Party with (PIN)
PowerShares—as the second to launch—has undercut the annual expense ratio of WisdomTree's India ETF, charging 0.78% versus EPI's 0.88%. The 10-basis-point gap in the expense ratios will surely make a difference in attracting investors, especially with the similarities in the indexes. However, EPI holds roughly 100 more companies than PIN, so some investors may be drawn to its broader scope. Another determining factor will be weighting methodology, as EPI's weightings are based mainly on earnings, while PIN's are based mainly on the amount of investable market capitalization available to foreign investors.