Franklin FTSE India ETF: India-Focused ETF To Consider For 2023 (NYSEARCA:FLIN)

The Franklin FTSE India ETF (NYSEARCA:FLIN), which gives investors exposure to the leading Indian companies, should do well in the future as India registers strong economic growth in 2023. The ETF’s core holdings, including companies like Reliance Industries, seem well-placed to grow earnings. This should help push Franklin FTSE India ETF higher. I believe this, combined with its low expense ratio compared to other India-focused ETFs, makes it a standout choice for investors to consider.

About FLIN

The Franklin FTSE India ETF gives investors access to all of the leading companies that trade on the Indian stock markets. The ETF tracks the performance of the FTSE India Capped Index, which is a market-cap-weighted index designed to follow large and mid-cap Indian companies. Since Franklin FTSE India ETF, or FLIN, is a market-cap-weighted fund, its portfolio is dominated by the biggest Indian companies.

FLIN allocates the largest percentage of assets to the biggest companies and vice versa. However, the caps on exposure to individual companies ensure that FLIN remains a diversified ETF, without any strong bias in favor of a single stock. Unlike other market-cap weighted ETFs, FLIN is not a top-heavy fund. The ETF’s exposure to an individual holding is capped at 25% and the combined exposure of all holdings with a weight of more than 5% does not exceed 50%.

FLIN holds a total of 204 large to mid-cap Indian stocks, with a weighted average market capitalization of $52 billion. FLIN’s top five holdings are the oil to chemical, telecom, and retail conglomerate Reliance Industries (OTCPK:RELEY), IT services and consulting giants Infosys (INFY), and Tata Consultancy, India’s biggest housing NBFC in terms of assets HDFC (Housing Development Finance Corporation), and India’s largest FMCG and Unilever (UL)’s subsidiary Hindustan Unilever. Reliance is the only company with a double-digit weight of 10.2%. Together, FLIN’s top-5 stocks represent approximately 29% of the ETF’s assets.

Why India?

India’s economy, much like the rest of the world, has come under pressure amid a tightening monetary cycle and surge in commodity prices. In the July-September quarter, the country’s economy expanded by 6.3% on a year-over-year basis as opposed to the 13.5% growth reported for the April-June quarter. The country’s central bank has slashed the country’s GDP growth estimate for the ongoing year that will end on March 31 to 7% from 7.2%. The Indian Rupee has also depreciated sharply in 2022, losing its value by almost 10% against the US dollar. Shares of Indian companies also came under pressure and FLIN dropped by 10% on a year-to-date basis.

Moving forward, I expect a slowdown in global economic growth, tightening financial conditions in numerous markets, high levels of inflation in many regions, geopolitical tensions in the aftermath of Russia’s invasion of Ukraine, the threat of a resurgence of COVID-19, and lofty commodity prices to put pressure on India’s economic growth in 2023.

That’s also true for practically all emerging nations who are also struggling with anemic growth, with some, such as India’s neighbor Pakistan, relying on the International Monetary Fund to bail out their economies. However, I believe India is better positioned than most of the other emerging markets to face this storm.

The global economic slowdown will likely hurt India’s key export sectors, such as textiles and apparel who have reported a meaningful slump in demand. But India is a consumer-led economy, backed by its population of 1.2 billion people who have increased spending in the post-pandemic era. The country’s massive domestic market should soften the blow coming from weakness on the external front.

There has been an increase in demand for goods like vehicles and services like hospitality in India, compared to pre-pandemic levels. Indian banks are also seeing a surge in demand for credit and a drop in default rates, which is contributing to economic growth. During the three months ended September, private consumption climbed by 7.8% from the same period in 2019. In another sign of its robustness, the country has been experiencing strong demand for electricity due to the uptick in commercial and industrial activities. That’s pushed the demand for coal higher which accounts for around 75% of the country’s power output.

Why FLIN?

Despite the slowdown, I believe that India will have strong economic growth and outperform most other emerging economies in 2023. The nation’s GDP could expand by 6% in the next fiscal year which starts from April 1, 2023, a recent survey conducted by the central bank shows. I think this is a reasonable estimate which indicates a drop in growth from around 7% projected for the current year but still ranks India among the fastest-growing Asian economies. Indian companies, especially those that serve the domestic market, should be able to capitalize on this growth. Through FLIN, investors can gain exposure to such companies.

Note that besides FLIN, there are a few other ETFs as well that hold Indian companies, such as the iShares MSCI India ETF (INDA), WisdomTree India Earnings ETF (EPI), and iShares S&P India Nifty Fifty Index ETF (INDY). The top holdings of all of these ETFs are similar, albeit not identical, with Reliance being featured as the number one stock in all of these with a weight of around 8% to 11%.

The ETFs, however, differ in terms of the number of holdings. On one end of the scale is EPI which seeks to give broad exposure to all kinds of Indian stocks and has more than 400 companies, while on the other end is INDY which holds 50 of the biggest Indian companies. With EPI, investors might get those small-cap companies as well who are not well established and could struggle in the current economic environment (discussed below) while with the narrow focus of the INDY, investors might miss out on the mid-cap winners.

On the other hand, FLIN and INDA hold both large and mid-cap Indian stocks. However, INDA holds 131 stocks and is less diversified than FLIN in terms of the total number of holdings, weight of the top sector, and the combined weight of top 10 holdings.

For instance, the top-10 stocks represent 38.5% and 45.6% of FLIN and INDA’s assets respectively. If the top-10 stocks were to come under pressure, then their impact will be less severe on FLIN as compared to INDA. This is especially relevant considering the significant overlap between the top-10 holdings of the two ETFs. Except for India’s biggest paint maker Asian Paints Ltd, all of FLIN’s other 10 largest holdings are also featured as top-10 stocks in INDA.

What I also like about FLIN is that even though, in many ways, its portfolio is similar to INDA’s, FLIN comes with a meaningfully lower expense ratio of 0.19%. This means the fund charges just $19 each year for every $10,000 investment. By comparison, INDA comes with a higher expense ratio of 0.68%. In fact, in these terms, FLIN is the cheapest India-focused ETF, since EPI and INDY also charge higher expense ratios of 0.84% and 0.89% respectively. FLIN’s lower expense ratio can be beneficial for long-term oriented investors, considering how its positive impact on returns can compound over time.

The financials sector holds the top spot in FLIN, representing almost 20% of the ETF’s assets. In my opinion, this might work out well for investors in 2023. As indicated earlier, the country’s banks are experiencing a surge in credit offtake. This, combined with the economic growth and the rate hikes from the central bank which has now increased the key policy rate by five times in a row to 6.25%, should help push their profits higher. Some of FLIN’s top holdings, like HDFC, might grow earnings in 2023 which should fuel a rally in their shares.

I believe Reliance Industries, FLIN’s number one stock, also seems well-positioned to experience growth in earnings in the near future, which might help push its shares higher. Reliance is an industrial powerhouse that is capitalizing on the turmoil in the global oil market in the aftermath of Russia’s war with Ukraine. The company owns the Jamnagar Refinery – the biggest in the world, capable of processing up to 1.2 million bpd of crude oil – and is a major exporter of fuels. Reliance has been obtaining discounted crude oil from Russia, processing it at its refinery to create different kinds of fuels, and selling them to both domestic and international buyers at an attractive margin.

I think Reliance’s telecommunications and retail operations have the potential to significantly contribute to the company’s future growth. The company’s retail business is benefiting from the increase in post-pandemic spending and it is capitalizing fully on this trend by opening hundreds of new stores every month (795 new stores opened in the previous quarter) and using WhatsApp to drive online sales. On the telecom front, the rollout of Jio’s 5G network, the increase in market share, and the expected tariff hike could drive top and bottom-line growth.

Takeaway & Risks

In short, India’s economy will likely outperform other emerging markets in 2023 and FLIN’s holdings, such as Reliance Industries, could report earnings growth on the back of favorable conditions in the domestic market, which might push the ETF higher. However, FLIN’s biggest holdings, including Reliance Industries and HDFC, are all trading above 20x next year’s earnings estimates. At their current price levels, I think they aren’t a bargain and value hunters might want to wait for a dip before buying FLIN.

It is, however, important to consider some risks associated with FLIN as well. Firstly, some of the ETF’s holdings like Infosys earn a large chunk of their revenues from outside of India and their earnings and margins might decline due to global economic pressure. Secondly, an investment in FLIN can also expose investors to the risk of additional weakness in the value of the Indian Rupee which, as mentioned earlier, dropped by 10% against the US dollar in 2022.

Thirdly, India might fail to achieve robust economic growth, especially if inflation gets out of control or commodity prices climb back again to multi-year highs. Fourthly, FLIN is a relatively small-sized ETF, with just $53 million of assets under management, and it might not be suitable for those who seek high levels of liquidity or wish to move quickly in and out of positions.

Finally, if we see a resurgence of coronavirus cases, similar to what is occurring in China, then the Indian government might implement lockdowns or travel restrictions in order to contain the spread of the virus. This could potentially harm economic growth. If domestic demand is impacted by such factors, Indian companies may struggle to maintain or increase their earnings. This could potentially lead to a decline in FLIN.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.