Investors should note that the India’s Oil Ministry is currently going through a report prepared by the head of the Prime Minister’s Economic Advisory Council which recommends a new pricing mechanism through which the country’s natural-gas prices will be closely linked with the international prices. If the plan is approved then I believe this could considerably change the fortunes of both Reliance Industries and Oil & Natural Gas Corporation Limited (NSE:ONGC) as natural-gas prices will almost double.
With the current softness in crude prices, analysts have identified that the sector looks undervalued at the moment. Due to reasons mentioned above and the ever- increasing energy demands of India, I am long-term bullish on the country’s energy-focused ETFs, particularly the PowerShares India, which allocates a quarter of its funds towards the energy sector.
I believe that WisdomTree India Earnings Fund is not as attractive as PowerShares India at the moment due to the former’s focus on the financial sector, particularly after the beating which the banking sector took during the current downfall at the Bombay Stock Exchange, or BSE.
Although on an year-to-date basis both ETFs have recorded a net outflow of $32.6 million (PowerShares India) and $156.6 million (WisdomTree India Earnings Fund), in the shorter time frame, i.e. the current quarter, PowerShares India has seen a net inflow of $8.2 million while WisdomTree India Earnings Fund continues to record a net outflow of $64.9 million.
However, if you are looking for exposure only toward the biggest Indian firms, then perhaps iShares S&P India Nifty 50 Index is a better option. This ETF focuses exclusively on the 50 largest Indian firms in terms of market cap. This fund is heavily weighted toward financial services and gives more than 22% to banks and 7% to other financial institutions but the energy sector isn’t far behind. More than 11% of the funds go toward energy firms. Reliance Oil & Natural Gas Corporation Limited (NSE:ONGC) and are its fourth and 10th biggest holdings. Unlike PowerShares India or WisdomTree India Earnings Fund, iShares S&P India Nifty 50 has posted positive flows on both year-to-date and on a current quarterly basis.
I believe that due to iShares S&P India Nifty 50 ETF’s focus on giant cap stocks, it is a relatively safer investment which generates lower returns. This is also evident in its higher costs with a management fees of approximately 0.9%, which is more than what PowerShares India and WisdomTree India Earnings Fund charge. Nonetheless, iShares S&P India Nifty 50 can be a healthy low-risk-low-return addition to your portfolio.
Bottom line
Recently, the BSE’s benchmark 30-share index Sensex closed to a record one-month low amid concerns over the falling levels of manufacturing activity. The PowerShares India Portfolio ETF certainly looks like a good investment option for those looking for exposure toward India’s energy sector but I believe the markets currently require some stability for this sector to become really attractive. This holds true for iShares S&P India Nifty 50 ETF as well. The fundamentals of the markets are strong and now it needs a catalyst — which could come in the form of a new government (elections due next year) — to really turn bullish.
Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article A Brighter Future for India’s Upstream Energy Sector originally appeared on Fool.com.
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