Barclay's Offers an Indian Stock Market ETN (Not an ETF)

A couple months ago, I wrote a post about the iPATH MSCI India Index exchange traded security (symbol: INP) that tracks an India stock market index. I indicated that this was the first India stock market Exchange Traded Fund ("ETF"). However, I have since discovered that INP is an Exchange Traded Note ("ETN"), not an ETF.

The ETN is a derivative (perhaps similar to futures) that is designed to track the MSCI India Total Return Index. ETFs typically hold shares of stock of the underlying constituents of the various indices that they are designed to follow. An ETN, on the other hand, is an issued security that the issuer promises will track the index. Accordingly, because no shares of the underlying index securities are held within the ETN, the owner of an ETN puts his or her faith in the issuer to maintain the appropriate value to track the designated index. Accordingly, the credit-worthiness of the issuer is a concern for anyone purchasing an ETN.

The Motley Fool published a gloom-and-doom article about this a few months ago. As usual, the Motley Fool's article was very superficial and did not really explain how the ETN's value is derived. I will admit that I am no expert on ETN, but I have to believe that Barclay's (the issuer of INP) hedges its risk through a combination of futures and/or options tied to the benchmark MSCI India Total Return Index.

Barclays Offers the Only Indian Stock Market ETF

I have previously written about India and how the best way to invest in the Indian stock market was through closed-end funds that invest directly in Indian stocks. India is one of the rapidly growing emerging markets and was dubbed a "BRIC" country in a widely-read 2003 Goldman Sachs report on emerging markets. In the Goldman Sachs report, Goldman projected the Indian ecomony to rapidly grow over the next 40 years at a rate far faster than the western world. The image below is from the Goldman Sach's report and illustrates the projected annual growth rates of the various BRIC countries. As one can see, India's growth rate over the next 40 years is prjected to be far stronger than that of the other BRIC countries.


Although there will undoubteld be hiccups in India's growth, the appreciation of stocks listed on its exchanges should generally correlate to the country's overall economic growth. India is an open democracy with a rapidly expanding population and is probably more politcally stable than the other BRIC countries, Russia, China, and Brazil.

I was pleased to recently discover that Barclays now offers the first Indian stock market ETF (Barclay's actually offers an ETN, not an ETF, as discussed here). Apparently this ETF went public in Deceomber 2006, but I only recently read about it. The name of the ETF is the iPATH MSCI India Index ETF (symbol: INP). It seeks to represent approximately 85% of the free-float-adjusted market capitalization of equity securities by industry group within India. As of March 31, 2007, the Index was comprised of 69 companies listed on the National Stock Exchange of India (the "NSE"). According to Barclays, the index had annual returns of 38.1% over the past five years (through April 30, 2007), 40.33% over the past three years, and 30.36% over the past year.

I am glad to see that someone is finally offering an Indian ETF. ETFs generally have much lower expense ratios than similar mutual funds or closed-end funds and are becoming more and more popular with investors. I will probably purchase some shares of INP the nest time I invest in the stock market, as this new ETF appears to be the best way for small investors to profit from the Indian stock market.