Wisdom Tree Investments of New York is set to become the first asset management firm to launch an exchange-traded fund that invests exclusively in the emerging market country of India, with the planned launch of the Wisdom Tree India Earnings Fund ETF by the end of February.
The ETF will follow its own proprietary earnings-weighted fundamental index of 50 companies spread across several sectors. That means that companies with the greatest earnings metrics will be weighted as larger components, regardless of the sectors they fall into.
Right now, companies within the energy sector make up almost 24% of the Wisdom Tree index, with the materials sector falling in between 15% and 16% and the combined technology and telecommunications sector weighing in at between 18% and 19%. Companies within the financial sector comprise a collective 14%.
Wisdom Tree has been working behind the scenes for about a year to develop the investment fund and get the appropriate regulatory authority, company officials confirmed. Not only did the Securities and Exchange Commission have to give the India ETF the green light, but the Securities and Exchange Board of India had to approve Wisdom Tree as a qualified foreign institutional investor.
"Wisdom Tree has already added a tremendous amount of choice into the market internationally, and India is an extension of that," said Bruce Lavine, president and chief operating officer of Wisdom Tree. "We think investors are looking for exposure to emerging markets, of which India is one, but they have had limited choices." Of the 39 ETFs Wisdom Tree currently sponsors, 29 invest in markets outside of the U.S.
Wisdom Tree is not the first to step into investments in India. Two closed-end India funds exist, one from Morgan Stanley, another from Blackstone Group. In addition, Matthews International and Eaton Vance both offer open-end mutual funds that invest exclusively in India. This past May, JPMorgan Chase launched its own India Fund, which has so far attracted $73 million, according to Morningstar. And several funds that invest in developing BRIC countries (Brazil, Russia, India and China) and/or more diversified emerging markets are leaning heavily into India. T. Rowe Price's $5.6 billion New Asia Fund, as of year-end 2007, had close to 40% of its assets in Indian companies. Funds that invested heavily in Asia in 2007 showed stellar returns for last year of between 55% and 64%.
"India is trendy now and has done relatively well," confirmed Bill Rocco, a senior analyst with Morningstar. But the real question is: "Why would you want to single out one emerging market to focus on?" he asked. If you invest in a BRIC fund, then you're not beholden to India should the Indian market sink. "It's not the worst idea for an ETF," he said adding that it's likely geared more for the sophisticated investor who may already have international portfolio allocations and wants to broaden out as opposed to investing in just one or two Indian stocks.
Emerging-market investments also tend to be heavily concentrated in specific sectors, such as telecomm, finance or natural resources. That inherently also adds sector risk to the mix, Rocco noted.
A New Recipe
Wisdom Tree is focused on attracting investors who want another investment tool, Lavine noted. The new ETF will invest directly in Indian companies as opposed to other investment sponsors who may be limited by their investments only in American Depositary Receipts, company officials said. In addition, because the newly constructed ETF tracks to its own index, which Lavine maintains is better than other widely used alternatives, it won't look like other investments that typically track to the MSCI India Total Return Index.
The MSCI India index is a market-cap-weighted index that seeks to represent about 85% of the equity securities market of India.
Furthermore, Wisdom Tree is hoping to siphon market share from the iPath MSCI India Index ETN (exchange-traded note) that Barclays Bank debuted in December 2006, the only emerging market ETN Barclays offers. The ETN, which differs from an ETF in that it is backed only by Barclays' promise to repay the investment at maturity, doesn't actually hold the securities. Instead, it uses derivatives securities to provide comparable exposure to the index's equity components, which ran into a regulatory brick wall several months ago.
In late October 2007, India's securities regulator ruled that it would no longer allow foreign investors to obtain exposure to the Indian securities market via the use of derivatives, which derailed Barclays' ETN.
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