Despite a sagging economy, India was Asia’s second-best performing stock market last year, trailing China, thanks to the new reforms led by prime minister Narendra Modi and hopes of further development. The optimism continues this year with many forecasting better days given that the first full-year budget from the business-friendly government is around the corner (read: India ETFs: Best of the BRICs Now?).

The Indian economy has been improving substantially after the pro-growth government took office in May. This is especially true, as inflation has fallen drastically, current account deficit has narrowed sharply with rising exports and declining imports, and the currency has moved up from record lows. Further, lower oil prices and rising consumer spending added to economic strength. Notably, India imports more than 75% of its oil requirements, thus being highly susceptible to oil prices.

Among the latest series of actions, the Reserve Bank of India (RBI) joined other countries to boost the domestic economy and fight stubborn inflation. The central bank last month cut its key interest rate by 25 bps to 7.75%, marking the first rate cut in about two years. In addition, the RBI eased its longstanding restrictions on gold imports ahead of the budget wherein Modi expects to cut gold import duty (read: India ETFs Surge After Surprise Rate Cut).

What to Expect from Budget?

Expectations are riding high for the first Modi budget, which is most likely to be growth oriented. A shift in the monetary policy is expected to revive investments and spending in the county. The market is hoping for a number of new initiatives and major reforms to promote programs launched by Modi in the past few months including People Money Scheme, Direct Benefits Transfer, Clean India Mission, Make in India, and Digital India.

In terms of tax structure, various surveys state that the country’s finance minister could increase the individual income tax exemption from Rs. 0.25 million to Rs. 0.3 million and interest exemption on housing loans from Rs. 0.2 million to Rs. 0.5 million. Additionally, the exemption limit under section 80C of the country’s Income Tax Law that allows certain investments and expenditure to be deducted from total income is expected to be increased from the current Rs. 0.15 million per annum.

ETFs in Focus

Given that the budget is just a day away; India ETFs will be hugely in focus in the coming days. Investors could ride out this opportune moment with the following ETFs even if the budget meets partial market expectations. The products saw a stellar run over the trailing one-year period, crushing the global market fund (ACWI - ETF report) and the broad emerging Asia Pacific fund (GMF - ETF report).

Below are funds that have an excellent Zacks Rank of 2 or ‘Buy’ rating, suggesting continued outperformance this year (see: all the emerging Asia Pacific ETFs here).

iShares India 50 ETF (INDY - ETF report)

This ETF is a large cap centric fund and follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. Infosys, ITC, and HDFC Housing Development Finance occupy the top three positions in the basket with over 7% share each. With respect to sector holdings, banks and software take the top two spots at 22.3% and 15.8%, respectively, while others make up for single-digit allocations.

The ETF has amassed $865.3 million and trades in volume of nearly 350,000 million shares a day. It is the high cost choice in the space, charging 94 bps. The product surged nearly 44% in the trailing one-year period.   

WisdomTree India Earnings Fund (EPI - ETF report)

This product tracks the WisdomTree India Earnings Index, holding 230 profitable companies using an earnings-weighted methodology. Infosys, Housing Development Finance and Reliance Industries occupy the top three positions with a combined 23.2% of assets The fund is heavy on financials with more than one-fourth share, while information technology and energy also get double-digit allocation in the basket. Further, it has a definite tilt toward large cap securities.  

EPI is the second largest and very popular ETF in this space with AUM of over $2.3 billion and average trading volume of around 4.7 million shares. Expense ratio came in at 0.83%. The fund has returned about 44% over the trailing one-year (read: Yet Another Reason to Buy India ETFs Now).

iShares MSCI India Small Cap Index Fund (SMIN - ETF report)

This product provides exposure to the small cap segment of the broad Indian stock market by tracking the MSCI India Small Cap Index. Holding 179 securities in its basket, it is widely spread out across number of securities with each holding less than 3% of assets. Financials takes the top spot making up for one-fourth portfolio, closely followed by consumer discretionary (19.8%) and industrial (19.2%).

Though the fund is unpopular and illiquid with AUM of $35.7 million and average daily volume of 20,000 shares, it surged over 74% over the trailing one-year period. The product charges 74 bps in annual fees from investors.