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This India ETF Is Soaring

March 17, 2017: 07:47 AM ET

Buoyed by a key in for Prime Minister Narendra Modi's party in India's Uttar Pradesh state, India stocks and the corresponding U.S.-listed exchange traded funds have been ripping higher. That includes the PowerShares India Portfolio (NYSE: PIN).

On Thursday, nearly 10 India ETFs hit 52-week highs and PIN was part of that group. That brings PIN's year-to-date gain to 18 percent, or 500 basis points better than the MSCI Emerging Markets Index. PIN tracks the Indus India Index and holds 50 the largest companies in Asia's third-largest economy behind China and Japan.

Remember, India stocks and ETFs have been soaring after the country, in November, removed high-denomination currency notes from circulation. That was seen as a controversial move because it affected more than 85 percent of Indian currency in circulation at the time.

“With this unprecedented move, the government aimed to reduce corruption, eliminate the exchange of fake currency and prevent terrorist financing,” said Invesco in a recent note. “This move caused a temporary economic disruption, as the public had limited time to exchange their cash holdings for newly printed notes or deposit any old currency into authorized banks and post offices (with specified daily withdrawal limits). If money was not exchanged during the set time limit, the old currency notes became worthless.”

The currency circulation issue could explain why investors have been apprehensive about PIN. Although the ETF is soaring to this point in 2017, investors have pulled $129 million from PIN year-to-date, a total exceeded by just four other PowerShares ETFs.

PIN may appear expensive relative to the MSCI Emerging Markets Index, but Indian stocks currently trade at multiples that are in line with historical averages.

Valuation likely isn't investors' primary concern with Indian stocks. Familiar issues such as high inflation and slow-moving government reforms are the considerations for foreign investors when mulling stakes in Indian stocks or ETFs.

The $256.4 million PIN allocates over a quarter of its weight to energy stocks while the technology and financial services sectors combine for 34.4 percent of the ETF's roster. PIN has ample export focus, but it could be the ETF's more domestic holdings that drive it higher.

“We have maintained a positive bias toward consumer spending. This structural bias is supported by our long-term view that consumption could remain by far the most important economic pillar in India, accounting for two-thirds of gross domestic product. Moreover, India is an inward-looking economy more focused on domestic economic activities, with favorable demographics that should increase consumption over time,” said Invesco.

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