How to Get Into This Red-Hot Emerging Market

Emerging-market stocks were big losers in 2011. But this year, the emerging world is back with a vengeance -- and a new ETF is available to help you get into one of the most promising emerging markets out there. But do you really need it -- or do existing investments already do the job perfectly well?

Later in this article, I'll reveal the name of this new ETF and look at whether it's worth buying. But first, let's take a quick look back at what happened to emerging markets last year and so far in 2012.

The big reversal
Throughout much of the lost decade for U.S. stocks, investors have looked to the stock markets of emerging economies to provide growth. And for much of that time, they delivered, with big gains that knocked the socks off the laggard S&P 500 and other developed-market indexes. The global financial crisis in 2008 hit them for a loop -- as it did the rest of the world -- but most of them bounced back pretty strongly.

By 2011, though, even emerging-market economies looked vulnerable to a new slowdown. China's Shanghai index lost more than 20%, Brazil's Bovespa tumbled almost 20%, and the Indian stock market saw a quarter of its value disappear last year. All three countries took steps to fight inflation in their economies, which in turn threatened to cool off their impressive economic growth.

But now, emerging-market investors are back. In particular, India's Sensex index is up almost 15%. Are the good times back for India?

Bring on the ETFs!
ETF provider iShares seems to think so. Last week, it brought a new ETF to market, the MSCI India Index ETF. The fund owns six dozen Indian stocks, including the following:

  • Infosys (NAS: INFY) is the ETF's largest holding at about 10% of assets. The IT outsourcing specialist rises and falls with the tech economy, but lately, times have been good for technology, and Infosys appears to be in a strong position to capitalize.

  • The banking sector also plays a key role in both the Indian economy and the new iShares ETF. HDFC Bank (NYS: HDB) and ICICI Bank (NYS: IBN) both provide essential capital for both consumers and businesses, with HDFC having maintained an excellent risk-management profile even through choppy economic times for the nation. Yet ICICI trades at a much more manageable price-to-book ratio of less than 2, arguably offering better value.

  • Tata Motors (NYS: TTM) has suffered lately, as profits have fallen on higher commodity costs and slower Indian sales. The big issue for Tata is whether high oil prices will persist, as costly fuel along with rising interest rates have led to a huge drop in car sales throughout the subcontinent.

What's the catalyst?
One reason why Indian stocks are moving now has to do with Indian government policy toward foreign investment. With the Indian rupee falling 16% against the U.S. dollar, the country needs to encourage investor interest.

To do that, it eased its currency controls, allowing nonresidents to earn higher interest rates on deposits. It also opened its stock markets to foreign investors without having to go through mutual funds. Those moves, it hopes, should encourage inflows of foreign capital.

Why this ETF?
The real question, though, is why iShares decided to come out with this ETF now. It already has an Indian ETF, S&P India Nifty 50 Index, with more than $300 million under management. Although its holdings aren't identical, you'll find Infosys, ICICI, and HDFC all among the top 10.

Moreover, the ETF comes into an already crowded space. WisdomTree has its own Indian ETF, which is weighted based on company earnings. Closed-end funds Morgan Stanley India Investment and India Fund (NYS: IFN) also give you similar exposure -- and both at a significant discount to their net asset values.

India has plenty of promise, despite its challenges. Given the power that iShares has, its new India ETF will almost certainly become successful. But other alternatives are just as good -- if not better -- for letting you get exposure to India's growth story.

Emerging-market stocks are useful, but you should keep some of your money close to home as well. Get some good ideas from The Motley Fool's latest special report, which reveals the names of three stocks set to capitalize on worldwide growth. The report is free -- but don't wait: click here and read it today.

At the time thisarticle was published Fool contributor Dan Caplinger thinks enough is enough with ETFs. You can follow him on Twitter here. He owns shares of India Fund. Motley Fool newsletter services have recommended buying shares of HDFC Bank. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy works the whole world 'round.

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