WisdomTree launches India quality-screened smart beta ETF

Mar 15th, 2017 | By | Category: Equities

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WisdomTree has launched the WisdomTree India Quality UCITS ETF (EPIQ) on the London Stock Exchange, offering smart beta exposure to Indian equities with a focus on quality companies.

WisdomTree launches India quality-screened smart beta ETF

The WisdomTree India Quality UCITS ETF tracks a minimum of 50 Indian equities whose companies have passed quality screens.

The physically replicating fund tracks the WisdomTree India Quality Index. Eligible securities must be listed on the Bombay Stock Exchange, must be incorporated in India, and have earned at least $5 million in the previous fiscal year. In addition, companies must have a market capitalization of at least $200m and an average daily dollar volume of at least $200,000 for each of the previous six months.

Eligible companies are then ranked using an equal weighting combination of two quality factors: historical three-year average return on equity (ROE), and historical three-year average return on assets (ROA). These factors have provided consistent exposure to quality stocks, offering the potential to deliver above average risk adjusted returns over the long term. The top third of all eligible component companies, or at least the top 50 companies ranked by this mechanism, will be selected for inclusion in the index. At least one company from each sector must be selected for inclusion.

By using both ROA and ROE to measure quality, the methodology may provide a more robust screen in favour of firms which generate profits efficiently. This approach is used because while ROE can gauge profitability, it can be inflated by leverage. ROA offers a means of mitigating over-leverage, and combined with ROE, offers a way of screening for sustainable earnings.

The index constituents are then weighted by free-float market capitalisation with a security cap of 5% and a sector cap of 25%.

As of 31 January 2017 the index has 105 constituents with roughly 45% exposure to both the large-cap (greater than $10bn market cap) and mid-cap (between $2bn and $10bn market cap) market segments. Approximately 10% is in small cap stocks (less than $2bn market cap).

The largest sector exposures are information technology (22.7%), consumer staples (18.8%), health care (15.1%), consumer discretionary (12.5%) and industrials (8.9%).

“We’re excited to be launching EPIQ, an innovative ETF that provides a quality tilt on the Indian equity market,” said Nizam Hamid, ETF Strategist, WisdomTree. “Our fund has the advantage of diversification, with over 100 constituents, and a broad sector exposure tilted towards the core drivers of growth in the Indian economy.”

The largest single holding is ITC (5.2%).

WisdomTree believes the Indian equity market offers an exciting opportunity for investors as India currently has the world’s seventh largest economy and the fourth largest equity market within emerging markets.

Recent IMF estimates state India’s five year average growth rate is expected to be 8.1%, positioning it as the world’s fastest growing large economy over this period. The economy has recently been growing at a rate of 7.5% per annum. WisdomTree believes these positive fundamentals are underpinned by favourable demographics, a boost to fiscal spending, a lowering of tax rates and a stable political climate committed to reform.

“With a favourable global macro environment, decisive policy making and exciting growth trends, India has a compelling strategic as well as tactical allocation investment case,” Hamid added.

Morgan Lee, Head of European Distribution, said: “Investors have expressed enthusiastic interest in gaining exposure to the Indian equity market via a physically replicating UCITS ETF as, up until now, investor choices have been limited. The addition of our quality titled methodology provides a differentiated solution for those looking to allocate towards this exciting market.”

The fund has been listed with two share classes, a distributing GBP-denominated share class (Ticker: EPIQ), and an accumulating USD-denominated share class (Ticker: EPIE).

The London listing follows a week after the fund was rolled out on the Borsa Italiana and Germany’s Deutsche Börse where it trades in euros (Ticker: WTDZ).

It has a total expense ratio (TER) of 0.73%.

While WisdomTree’s ETF is the first to market in Europe that provides access to quality-screened Indian equities, there are a number of funds available that track the broad market MSCI India Index. The largest is from Lyxor – the $1.4bn Lyxor UCITS ETF MSCI India USA (LON: INRL) is also one of the most expensive at 0.85% per annum. The cheapest, from Deutsche Asset Management, is the Db X-tracker MSCI India Index UCITS ETF (XCS5) with $105m and a TER of 0.75%. Both funds use synthetic replication.

The LAM ZyFin MSCI India UCITS ETF (LON: MIND), launched in September 2016, became the first Europe-listed ETF to offer access to Indian equities through direct physical replication. It costs 0.89%.

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