FLIN: Ride This Ultra Low-Cost ETF Into India's General Elections

Basic information out of India has continued to be very sturdy by way of the primary quarter of 2024. Ahead-looking manufacturing PMI numbers, as an illustration, simply printed a sixteen-year excessive (as much as 59.1 in March from 56.9 in February) on power throughout each output and new orders. With India nonetheless within the early innings of its newest capex upcycle and core inflation additionally pacing at comparatively benign ranges, the near-term macro setup continues to face out among the many main economies.

Underwriting the subsequent leg of the Indian development story, although, will depend upon the end result of this yr’s basic elections, set to be held in phases from mid-April to early June. The important thing query right here is not whether or not the incumbent BJP-led NDA coalition (i.e., the ‘Nationwide Democratic Alliance’) will win the election however quite by what margin. A establishment ~350 seat victory (consistent with the 2019 elections) would nonetheless be a web constructive final result, even when it has possible been priced into markets, because it lends assist to ongoing reform efforts and the capex trajectory.

The extra fascinating chance, then again, is a state of affairs the place we see the NDA obtain or surpass Prime Minister Narendra Modi’s formidable 370-seat goal. Whereas little doubt a excessive bar that may require vital inroads into opposition states, such an final result would go away the NDA with a a lot stronger mandate to develop its reform push – suppose land reform laws (beforehand shot down) and the controversial nationwide ‘uniform civil code’ amongst others. It additionally expands the federal government’s fiscal leeway on the infrastructure funding and manufacturing fronts – each key tenets of ‘Viksit Bharat 2047’ (i.e., Developed India). Now, I would not pencil in a blue sky state of affairs for NDA simply but, nevertheless it’s actually value noting that some current polls point out a ~400-seat final result is not in any respect out of the query.

Plus, there’s ample cushion from earnings development, which, after a +26% yr in 2023, ought to proceed to tempo at a really strong low to mid-teens proportion by way of 2025. Additionally value noting is that even after the pre-election rally, Indian large-caps are priced fairly pretty, in my opinion, at ~22x ahead earnings. Because the lowest-cost single-country automobile with publicity to nearly all of India’s key themes, Franklin FTSE India ETF (NYSEARCA:FLIN) stays a good way to seize pre/post-election upside.

FLIN Overview – Even Bigger and Extra Liquid Than Earlier than; Charge Edge Intact

The Franklin FTSE India ETF, the lowest-fee Indian large-cap tracker, has seen its asset base develop fairly considerably to ~$898m (up from ~719m beforehand (see FLIN: Make investments In The Newly Topped Fourth-Largest Inventory Market Through Its Lowest-Charge ETF). FLIN’s bigger measurement has additionally translated into higher liquidity, with its 30-day median bid/ask unfold additional narrowing to ~3bps – impressively, just one foundation level behind the biggest and most liquid tracker, iShares MSCI India ETF (INDA)) and ~5bps higher than iShares India 50 ETF (INDY).

Complementing FLIN’s tighter spreads is its ultra-low charge construction, which, at ~0.2%, stays far under key alternate options, INDA (0.65%) and INDY (0.89%). In sum, FLIN’s total price edge has solely widened in current months, solidifying this ETF’s standing because the go-to Indian funding automobile for cost-sensitive traders.

FLIN Portfolio – A Extra Balanced Allocation

Along with FLIN’s ultra-low charges, the ETF’s weight caps, inherited by way of the capitalization-weighted FTSE India Capped Index it tracks, additionally differentiate it from easy MSCI India and Nifty 50 trackers. For context, FLIN maintains a 20% cap for any particular person holding and a cumulative 48% cap for all +4.5% holdings – topic to semi-annual assessment and reconstitution.

Consequently, the FLIN sector breakdown tends to be barely much less top-heavy than INDA and far much less so than the extra concentrated INDY. Living proof – per Franklin’s newest reporting, FLIN allocates much less to its high sector publicity, Financials (23.3%), than each INDA (24.8%) and INDY (33.5%). Elsewhere within the FLIN portfolio, there was some minor reshuffling, with Data Know-how (11.7%) ceding share to Shopper Discretionary (12.5%) after an enormous pullback in Q1 2024 for staple tech names. Power and Supplies additionally stay vital portfolio exposures at 11.3% and 9.9%, respectively.

Sector

Weight (%)

FINANCIALS

23.3

CONSUMER DISCRETIONARY

12.5

INFORMATION TECHNOLOGY

11.7

ENERGY

11.3

MATERIALS

9.9

INDUSTRIALS

9.8

CONSUMER STAPLES

7.2

HEALTH CARE

6.0

UTILITIES

5.8

COMMUNICATION SERVICES

3.3

REAL ESTATE

1.6

CASH & CASH EQUIVALENTS

0.2

–

-2.7

Grand Complete

100.0

Click on to enlarge

Supply: Franklin Templeton

On the single-stock stage, FLIN’s portfolio has been expanded but once more to 228 names. That mentioned, the 2 main holdings (Reliance Industries Ltd. (RLNIY) and HDFC Financial institution Restricted (HDB)) stay broadly unchanged. Tech companies names like Infosys Restricted (INFY) and Tata Consultancy Providers (TTNQY), then again, have seen their allocations decreased following a difficult first quarter. Additionally notable is FLIN’s bigger web lengthy publicity at ~103% (attributable to derivatives and unsettled trades), which lends the fund barely extra beta than comparable India trackers.

FLIN Efficiency – A Relative Outperformer however Thoughts the Monitoring Error

Having ended 2023 with a +20.7% NAV return (+20.6% in market value phrases), FLIN has began this yr on a really constructive notice as nicely (+5.9% thus far). On a relative foundation, this retains FLIN nicely forward of different large-cap Indian trackers. Of notice, relative to FLIN’s +34.6% one-year return, larger charge INDA and INDY have underperformed at +31.7% and +23.0%, respectively. Over longer three and five-year timelines, FLIN has equally outpaced its large-cap comparables, delivering an annualized complete return of +11.8% and +12.2%, respectively.

To a big extent, this relative outperformance is all the way down to FLIN’s extra balanced asset allocation method and decrease charges, although the fund’s larger web lengthy publicity has actually additionally performed a component. The latter may additionally have been key to FLIN narrowing the delta to its FTSE India Capped Index benchmark (i.e., the ‘monitoring error’) to ~72bps year-to-date. That being mentioned, I would proceed to maintain a detailed eye on the fund’s monitoring error, as even after adjusting for its low charges, FLIN has given up much more to its index in bull markets (seven to eight proportion factors over the past yr) in comparison with iShares’ India ETFs.

Experience this Extremely Low-Value ETF into India’s Basic Elections

Having outperformed by way of 2023, FLIN, together with the remainder of India’s large-cap universe, seems to be on observe for one more nice yr. The macro/micro setup could be as engaging because it’s ever been, however the important thing needle-mover will likely be basic elections (phased all through Q2 this yr), which is able to see the incumbent authorities seeking to develop its decrease home majority for the subsequent 5 years. Having executed a stellar job on the financial entrance thus far, the market will little doubt be on the lookout for an NDA win; any upside to the present ~350 seat ‘Lok Sabha’ majority might, thus, see equities rally strongly post-election. Within the meantime, Indian large-caps are nonetheless compounding earnings at a powerful tempo, so there’s nonetheless loads of upside left for FLIN traders both method.