iShares MSCI India Small-Cap ETF

SMIN

Market cap $929M

The iShares MSCI India Small-Cap ETF offers diversified exposure to over 500 high-growth Indian small-caps while serving as an apt diversifier for US investors (a beta of just 0.2x). SMIN's portfolio is heavily weighted toward cyclical sectors, and is likely to benefit from India's improving GDP landscape and recent tax reforms. However, SMIN's steep valuations, ongoing FPI outflows, INR weakness, an above-average small-cap to large-cap ratio, and a lack of momentum on the charts dampen the incentive to go long.

Among APAC equity markets, Australia has a higher beta to oil prices while India, Indonesia and Thailand have lower betas. Domestic political uncertainties have been one main reason for the decoupling trend seen in Indonesia and Thailand.

SMIN offers high growth and diversification potential but comes with elevated risk and expensive valuations compared to US growth ETFs like QQQ. Despite India's strong economic prospects, SMIN underperforms local small-cap indices due to currency drag and index construction but is the best passive US option. Current valuations in Indian small caps are frothy; past cycles warn of deep corrections, so fresh investments now carry significant downside risk.

I am upgrading the iShares MSCI India Small-Cap ETF (SMIN) to a buy due to improved valuation, despite technical caution. SMIN has underperformed, down 11% since November 2024, but offers a cheap P/E ratio of 16x and a PEG ratio under 1. The ETF's sector diversification includes 22% Industrials and 16% Financials, with a promising long-term EPS growth rate of 23%.

Indian small and mid-cap names have led the way down this year. But there are signs that the cyclical tide is turning. SMIN stands out as a compelling rebound play.

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Major Indian banks are expected to sustain high leverage ratios, as healthy profits and a rapidly growing economy will help them build buffers. India's economic growth, which slowed to 5.4% year over year in the July–September quarter from 8.1% in the same period in 2023, is expected to recover as most economists expect the government and companies to step up spending in the coming months.

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I am downgrading SMIN to a hold due to a higher P/E ratio and weakening technical trends despite strong long-term growth prospects. SMIN's portfolio is heavily weighted towards cyclical sectors, which could be vulnerable if emerging-market growth falters. The ETF's seasonality trends are weak from December to February, and technical indicators show bearish divergence and weakening momentum.

Recently, I mentioned India as one of the top themes this year. However, I wanted to go further in-depth into this thematic opportunity.