WisdomTree India Earnings Fund: Analyst Report

By ETFalpha
Contact(at)ETFalpha.uk

Name: WisdomTree India Earnings Fund
Symbol: EPI

Role in Portfolio

WisdomTree India Earnings Fund seeks investment results that correspond to the price and yield performance, before fees and expenses, of the WisdomTree India Earnings Index.

The WisdomTree India Earnings Index is a fundamentally weighted index that measures the performance of companies incorporated and traded in India that are profitable and that are eligible to be purchased by foreign investors as of the index measurement date. Companies are weighted in the Index based on their earnings in their fiscal year prior to the Index measurement date adjusted for a factor that takes into account shares available to foreign investors. For these purposes, “earnings” are determined using a company’s net income.

The index is tilted towards banks, software & services and energy. The three sectors make up almost 55% of the portfolio.   On the security level the top 10 names constitute approximately  44% of the portfolio. As India businesses continue expanding internationally some of the top 10 names are quality internationally recognized brands.

The fund distributes dividends from underlying stocks quarterly, therefore it might suit an investor seeking frequent levels of income.

Over the period of time between 29th February and 30 November 2014 , the EPI proved to be almost perfectly correlated with its two main competitors: the iShares MSCI India ETF (INDA) and iShares India 50 ETF (INDY).

On the global level, the coefficient of linear correlation between the EPI and EEM during the same period of time was 0.79 which confirms the level of strong correlation between the two ETFs. The result is a bit disappointing as it does not bring any great diversification benefits within a global EM portfolio. India constitutes around 7% of the iShares MSCI EM ETF (EEM).

EPI Correlation Matrix (29-Feb-2012 – 30-Nov-2014)

Courtesy of WisdomTree

Economy – Fundamental Insight

Since liberalisation, the value of India’s international trade has increased sharply, with the contribution of total trade in goods and services to the GDP rising from 16% in 1990–91 to 47% in 2008–10. India accounts for 1.44% of exports and 2.12% of imports for merchandise trade and 3.34% of exports and 3.31% of imports for commercial services trade worldwide.^[200] India’s major trading partners are the European Union, China, the United States of America and the United Arab Emirates. In 2006–07, major export commodities included engineering goods, petroleum products, chemicals and pharmaceuticals, gems and jewelry, textiles and garments, agricultural products, iron ore and other minerals. Major import commodities included crude oil and related products, machinery, electronic goods, gold and silver. In November 2010, exports increased 22.3% year-on-year to US$14 billion, while imports were up 7.5% at US$20 billion. Trade deficit for the same month dropped from US$7.6 billion in 2009 to US$6.5 billion in 2010.

India’s exports, by value, in 2013-2014.

India’s imports, by value, in 2013-2014.

As the third-largest economy in the world in PPP terms, India has attracted foreign direct investment. During the year 2011, FDI inflow into India stood at $36.5 billion, 51.1% higher than 2010 figure of $24.15 billion. India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewelry. Despite a surge in foreign investments, rigid FDI policies were a significant hindrance. Over time, India has adopted a number of FDI reforms. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and represents a growing consumer market.

A critical problem facing India’s economy is the sharp and growing regional variations among India’s different states and territories in terms of poverty, availability of infrastructure and socio-economic development. Six low-income states – Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha and Uttar Pradesh – are home to more than one-third of India’s population. Severe disparities exist among states in terms of income, literacy rates, life expectancy and living conditions.

Economic disparities among the States and Union Territories of India, on GDP per capita, PPP basis in 2011.

On August 6, 2013 it was announced that Dr. Raghuram Govinda Rajan would take over as the next RBI Governor. He was appointed RBI Governor for a term of 3 years succeeding D Subbarao whose term ended on 4 September 2013. His pro-economy approach together with the election of Mr Modi as the new prime minister of India triggered an unprecedented rally which began in September 2013. [Rajan’s Impact On the Local Stock Market – Biased Insight Into India ETFs].

In terms of GDP size, the India economy is the 10th largest in the world.

India GDP Size (data source: IMF).

Index/ETF Construction

The WisdomTree India Earnings Fund (EPI) seeks investment results that correspond to the price and yield performance, before fees and expenses, of the WisdomTree India Earnings Index.

The EPI ETF was almost $2.4 billion in size as of 12-Dec-2014. The portfolio is extremely well diversified with 231 holdings as of 12-Dec-2014. The top 10 names constitute approximately  44% of the portfolio. The top alliance allocation is only 7.74% so you don’t have to take any significant single equity related risks.

EPI Top Holdings

On the sector level the top allocations are financials, IT and energy. Altogether they account around 61% of the strategy.

EPI Sector Breakdown

Technical Charts

EPI ETF 3Y Absolute Performance Chart – Courtesy of StockCharts (12-Dec-2014)

EPI ETF 3Y Relative Performance Chart (EEM) – Courtesy of StockCharts (12-Dec-2014)

Fees

This fund levies a 0.83% expense ratio.

Alternatives

iShares MSCI India ETF (INDA) tracks the performance of the MSCI India Total Return Index, a popular index which asset managers use to benchmark their portfolios. The ETF charges 0.67% of expense ratio and is approximately $1.98 billion in size.

The iShares India 50 ETF (INDY) seeks to track the investment results of an index composed of 50 of the largest Indian equities. Effectively is tracks the S&P CNX Nifty Index, a popular India stock market index. The ETF is very expensive as it levies a 0.94% expense ratio. The total AUM of the portfolio is around $770 million.

Important Information Related to this Article

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Source: iShares, SPDR, Wikipedia, Morningstar

ETFs: EPI