GLIN: The Year of ‘GARP’ in India (NYSEARCA:GLIN)

Few stock markets have raised capital as consistently as India’s. And if the fundamentals are to go by, there are probably a lot more stages to this rally. Underpinning long-term growth is the gravitational (upward) pull of nominal GDP growth >10% p.a. – by far the fastest among the major global economies. And in the short term, most indicators, despite a single shot Last quarter’s GDP due to election-driven government investment delays and intense heat waves are firmly in the green.

However, there are concerns about the assessment; and on the face of it, justifiably so given where earnings multiples are relative to historical levels. While I would argue that there is more than adequate room for the stock to grow in its multiples over time, investors looking to play it safe should continue to find a lot to like with the VanEck India Growth Leaders ETF , more demanding (NYSEARCA:GLIN). GLIN’s after all “growth at a reasonable price” The (“GARP”) style consistently generates a portfolio with both lower stock valuation multiples and higher earnings growth. Perhaps most importantly, the GLIN approach has also translated into some very impressive returns – especially this year. In line with my previous coverage (see GLIN: A unique approach to investing in India) and ahead of this month’s big rebalance, I continue to rate GLIN highly.

GLIN Overview – India’s ‘GARP’ ETF

Within the India factor ETF universe, GLIN in its post-2020 incarnation stands apart. Unlike the simpler profitability filter used by the all-cap alternative, the WisdomTree India Earnings Fund ETF (EPI), GLIN incorporates a fairly complex multi-factor approach to stock selection, with the ultimate goal of replicating a strategy ” GARP”. More specifically, the fund, through its index provider, MarketGrader, runs eligible securities through a 24-metric screen; in order of importance, these include “Growth” (top and bottom lines), “Value” (forward multiples) and “Quality” (profitability and cash generation).

This more comprehensive approach naturally comes with higher fees; barring waivers, GLIN’s ~1.1% gross expense ratio is the highest among the three US-listed India factor ETFs. Liquidity isn’t great either – at a bid/ask of ~57bps, GLIN has much wider spreads than best-in-class EPI (~2bps) and Invesco India ETF ( PIN ) (~27bps).

As GLIN is a much smaller and less established fund, this cost trade-off (fees + execution) is not likely to change anytime soon. Essentially, the key here is underwriting the outperformance of “GARP” over the added costs associated with investing in the fund; those looking to do so should find plenty to like here.

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Sources: WisdomTree, VanEck, Invesco

The GLIN Portfolio – Finding the right balance

As of the most recent reports, the breakdown of the GLIN sector remains largely status quo. Like the other Indian ETFs, Financials is the biggest exposure, albeit down slightly by 28.9%. Information technology is the biggest gainer this time around, rising to 21.5% of the portfolio after a rally in the sector in recent months. The other key sector allocations, industrials (11.0%), consumer discretionary (10.4%) and health care (8.8%), are broadly unchanged.

As for the 80 unique stocks in the GLIN portfolio, there have been some reshuffles. While the largest holding remains Bajaj Auto (unchanged at 5.6%), Infosys Limited (INFY) is now a much larger holding at 5.3%. Of note, both are the only stocks above the 5% mark. Elsewhere, notable movers include non-bank finance major Shriram Finance (up ~5.0%) and another big Indian IT services name, Tata Consultancy Services (up 4.9%).

More broadly, GLIN maintains a fairly low/mid-cap exposure. While VanEck currently lists the large-cap to small/mid-cap split as 82.6%/17.4%, it uses a different market cap threshold for comparable key EPIs; Normalizing for this difference shows that GLIN leans much closer to small/mid caps than the headline numbers suggest.

Also notable is that GLIN’s stock selection process strikes a nice balance between growth and valuation multiples (hence the “GARP” strategy). Yes, there are plenty of state and cyclical companies here – both categories that (deservedly) trade at lower multiples over cycles. However, GLIN’s fundamentals make for impressive reading, from low double-digit average % earnings growth rates to returns on equity in the >20% range. Match this with a portfolio P/E (~23x forward) several times lower than most other Indian ETFs, and perhaps it’s not too surprising that GLIN has outperformed India ETFs this year.

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Source: MarketGrader

GLIN – “GARP” performance is again in favor

As we pointed out earlier, GLIN is much more active when it comes to managing its portfolio. This makes its relative performance much more unpredictable than your average conventional or factor ETF—both of which typically come with much less portfolio loss.

Consistent with this view, GLIN’s track record has been relatively inconsistent, fluctuating between periods of underperformance and, more recently, outperformance. An example – while the one-year NAV return of +43.6% is now well ahead of EPI (+36.7%) and PIN (+31.3%), GLIN’s three-year annualized return of +10 .6% continues to lag both EPI (+15.8%) and PIN (+12.9%) by a fair margin.

What has been consistent about GLIN, however, is its relatively narrow (by Indian ETF standards) tracking error against the benchmark MarketGrader India All Cap Growth Leaders. Yes, GLIN charges higher fees and has still lost more than five percentage points against its index over the past year. But compared to the EPI (one-year tracking error of more than nine percentage points) and PIN (almost eight percentage points) factor ETF alternatives, GLIN has done remarkably well.

Expect these tracking errors to widen further now that taxes on capital gains and securities transactions (the key drivers of tracking errors in Indian ETFs) have been increased. In this more challenging context for index funds, the “margin” of GLIN’s tracking error could be an invaluable source of performance over the medium to long term.

In the near-term, this month’s rebalancing event will be key to assessing where performance is headed from here. Note that this has historically been a large portfolio losing event – the last one in March had twenty-two single stock changes (out of a portfolio of nearly 80 stocks). After many of its shares have rallied in recent months, expect a bit of a shakeup this time around as well. Regardless, I’d be keeping a close eye on not just GLIN’s new portfolio, but also where the fundamentals and valuation shake out after rebalancing.

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Source: MarketGrader

Summarizing

India may be one of, if not the hottest, equity markets in the world right now, but the recent growth has undoubtedly led to pockets of wealth in the equity universe. For investors looking to “work around” these valuation concerns while avoiding the higher fees associated with an active manager, a “GARP” ETF like GLIN is a very worthy consideration. Yes, the upcoming rebalancing injects some uncertainty, but investors willing to support a selection process that has consistently balanced higher-than-average earnings growth with lower-than-average multiples will be well rewarded.