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Gordon Pape: These ETFs will help you play the new rising star of Asia

A few years ago, everyone wanted to put money into China. The country's GDP growth was the envy of the Western world, the rapid expansion of the middle class was fuelling demand for consumer goods, and stocks were booming.

That was then. Today, China has fallen out of favour with investors. Economic growth is faltering, business failures are on the rise, and the country faces the potential of a damaging trade war with the United States. Money is still flowing in, of course – you can't ignore the world's most populous country. But investors are more cautious and expectations muted compared with a few years ago.

The new rising star in Asia is India, where NSE 50 index (nicknamed the "Nifty 50") has been rising steadily since the start of the year. NSE stands for the National Stock Exchange of India and the index tracks the performance of the country's 50 largest companies. Few of the names will be familiar to Canadian investors but there are some exceptions such as Infosys, Tata Motors and State Bank of India. The stocks in the index cover a broad range of sectors including energy, finance, infrastructure, automotive, and pharmaceuticals.

The Nifty 50 finished 2016 at 8,185.8. Since Jan. 1, it has moved steadily higher, closing on Wednesday at 9,203.45 for a year-to-date gain of 12.4 per cent. That's more than double the 2017 return for the S&P 500 and well ahead of the gains posted Brazil and Hong Kong. As for the TSX, we're way behind with a gain of 2.4 per cent.

So why are investors in love with India at this point? Basically, because the country has a government that has shown it can get things done to grow the economy. Prime Minister Narendra Modi is regarded as a business-friendly leader who is able to move forward his priorities. His government recently pushed through a massive overhaul of the country's clumsy and out-dated tax system and is expected to move ahead with more changes ranging from deregulation to infrastructure spending.

Earlier this year, the country's Economic Affairs Secretary, Shaktikanta Das, predicted that the country will experience economic growth this year of 7 per cent plus. A United Nations report put the figure at 7.7 per cent this year and 7.6 per cent in 2018. By comparison, the International Monetary Fund is predicting 6.5 per cent growth for China's GDP this year.

India is also seen as less vulnerable to U.S. protectionism as it does not depend as much on exports as China.

The downside as far as investors are concerned is that India has always been a volatile marketplace, with huge market swings. The iShares MSCI India ETF, the largest U.S. based ETF that focuses on the country, was showing a year-to-date total return of 17.9 per cent as of April 6. But the fund posted losses in three of the four years from 2013 to 2016.

This ETF, which has almost $4.8-billion (U.S.) in assets under management, tracks the performance of MSCI India total returns index. It holds 78 securities. The trading symbol in New York is INDA and the 2016 management expense ratio was 0.65 per cent.

If you would prefer a fund that is based on the Nifty 50, look at iShares India 50 ETF (INDY-NYSE). It's a lot smaller than INDA, with about $850-million in assets but has a slightly better performance record so far this year at 18.6 per cent. That's despite a much higher expense ratio of 0.94 per cent.

INDY also has a better long-term performance record. As of March 31, it was showing a three-year average annual compound rate of return of 8.4 per cent versus 6.8 per cent for INDA. The five-year figures were 7 per cent for INDY and 5.6 per cent for INDA.

Some small-cap India funds are doing even better this year, with gains of over 30 per cent. The VanEck Vectors India Small-Cap Index ETF (SCIF-NYSE) is ahead 32.8 per cent this year while the iShares MSCI India Small Cap ETF (SMIN-NYSE) is ahead 30.2 per cent.

However, these funds tend to be more volatile than the large-cap ETFs, and are only recommended for aggressive investors who can deal with the risk. For example, SCIF lost almost 5 per cent in 2016 and shows a cumulative loss of 44 per cent since it was created in 2010. Be sure you understand the risks before you invest.

If you want a domestic product, there are two TSX-based ETFs on offer. The iShares India Index ETF (XID) is basically the same as INDY (it invests almost all its assets in units of that fund). It has a slightly higher MER at 0.98 per cent.

A better choice is the BMO India Equity Index ETF (ZID). It takes a different approach, tracking the BNY Mellon India Select DR index, which holds a basket of depositary receipts that trade in New York and London. The result is a much more concentrated fund, with only 15 holdings. The ETF has a lower MER at 0.72 per cent and an excellent track record, with a five-year average annual compound rate of return of 12.6 per cent. It has been profitable in every year but two since it was launched in 2010.

Finally, it would be inappropriate to discuss investing in India without mentioning the Excel India Fund, which has been around since 1998 and therefore provides good insight into the long-range impact of investing in the sub-continent. This mutual fund is doing well this year, with a gain of 10.6 per cent so far in 2017 (A series). And, since inception, it has generated an average annual compound rate of return of 11.4 per cent. Anything above 10 per cent is outstanding for a mutual fund.

But the fund is subject to wild swings in value. Its biggest 12-month gain came shortly after its launch, an advance of 202.4 per cent in 1999. But a couple of years later it dropped more than 60 per cent in the year ending March 31, 2001. Also, the fund has a very high MER, at 3.16 per cent.

My choice for readers who want to put some money into India at this stage is the BMO India Equity Index ETF. But don't lose sight of the risks. This fund lost 35.4 per cent in 2011, when emerging markets were hammered. It could happen again. The units closed in Toronto on Wednesday at $22.20.

Ask your adviser if this ETF is suitable for your account.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca.

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