ETF Teardown: India's Top Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds are now a popular investing tool.

ETFs hold a collection of stocks that share certain elements. For example, if investors want to capitalize on the prospects in India, they can turn to the iPath MSCI India ETN (NYSE:INP).

Since this ETF invests in a number of stocks, its diversity limits your upside. For an investor who was, say, really hip to Indian telecom companies but cold to the prospects of outsourcing firms, this ETF wouldn't fit the bill.

Fear not, Fools. In this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what India has to offer. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors quickly locate great stocks, the more than 5,300 stocks CAPS rates are tagged with descriptors that group the company with others sharing certain qualities -- "video games," for example, or "South Korea."

The "India" tag, for instance, returns 23 Indian companies or funds that trade on American exchanges. This particular collection of investments has done well over the past year, up 14.5% versus a 6.9% gain in the S&P 500 index.

To gauge which companies the CAPS community thinks offer the best opportunities in India today, we'll sort these businesses by their CAPS star rank (from one to the maximum five stars). We'll then examine CAPS data on each company to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Getting down to the nitty-gritty
Here are some Indian stocks gleaned from CAPS today:

To fund or not to fund?
Occupying a middle ground between individual stocks and a broadly diversified ETF tracking an index, two closed-end India-focused funds find high favor in the CAPS community. These funds -- the India Fund managed by Blackstone (NYSE:BX) and Morgan Stanley's (NYSE:MS) fund -- are different in that they do not try to match the broader returns of an Indian index; they try to beat them.

So far in 2007, the managed funds have fallen short, with the Blackstone India Fund appreciating 48% while the Morgan Stanley India Investment Fund has risen 27%. While these amounts don't include any dividends the funds pay, the returns are still well short of the 104% gain in the more diversified iPath MSCI India ETN, which tracks the MSCI India Total Market Index.

But the longer-term track record of each fund has been stellar, with each vaulting more than 500% in the past five years. With the long-term growth in India projected to continue at an explosive pace, the vast majority of CAPS investors are bullish on these funds as well. In fact, more than 95% of investors rating each fund believe they will beat the S&P going forward.

1.1 billion people like to talk
With more than 1.1 billion people, India is second only to China as a favorite growth market among telecom investors. Telecommunications is still wide open for growth. India's total telecom density is still relatively low, at a bit more than 21%, while mobile communications penetration is still below 20%. As in other developing nations, wireless communications is booming -- India's cellular operators combine to sign up roughly 8 million new mobile subscribers every month.

Telecom service provider Mahanagar Telephone Nigam Ltd (MTNL) is still majority state-owned, but it trades on local exchanges as well as via ADRs on the NYSE. While MTNL is only a minor player in the mobile market, with less than 3 million mobile subscribers, it provides fixed-line and other telecommunications services (such as broadband Internet service) in populous regions of Delhi and Mumbai.

But with MTNL's focus on growing its base of cellular subscribers in the future, a strong contingent of CAPS investors see plenty of opportunity ahead. Indeed, all 48 CAPS All-Stars rating the company unanimously vote for MTNL to beat the S&P in the future.

Lead a horse to water ...
Plucking individual stocks from India is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than taking recommendations -- after all, even the best stock pickers can be horribly wrong.

Do you agree that telecommunications companies are some of the best plays in India? Or are managed funds a better play? Give your own opinion in Motley Fool CAPS.