India ETFs Fall Amid Pakistan Strikes, Geopolitical Risk
India exchange-traded funds experienced a slight dip in value on Wednesday and Thursday following reports of military strikes conducted by India against targets within Pakistan. This reaction, however, has remained restrained, indicating a lack of widespread concern among investors regarding the escalating tensions between the two nations. The situation stems from a deadly attack in Indian-controlled Kashmir on April 22, which India attributed to terrorist infrastructure and characterized as “focused, measured and non-escalatory in nature.” Pakistan, in response, declared India’s actions an “act of war,” further inflaming the already strained relationship between the countries. These developments have placed a minor downward pressure on India-focused exchange-traded funds (ETFs), leading to a decrease in the value of three prominent ETFs: the $9.1 billion iShares MSCI India ETF (INDA), the $3.1 billion WisdomTree India Earnings ETF (EPI), and the $2.1 billion Franklin FTSE India ETF (FLIN). As of Wednesday’s close, these ETFs were down approximately 1%, and the trend continued into the opening of Thursday’s trading session. The broader Indian stock market also reflected these concerns, experiencing a similar decline.
The recent volatility serves as a stark reminder of the inherent risks associated with investing in emerging market ETFs, particularly those concentrated in geopolitically sensitive regions. Emerging market ETFs are frequently subject to heightened volatility due to factors such as political instability, regulatory uncertainties, and, as exemplified by this situation, potential military conflicts. The Kashmir region, situated along the borders of India, Pakistan, and China, is consistently recognized as one of the world’s most volatile areas. The complex geopolitical dynamics within this region – involving multiple actors with competing interests and possessing significant military capabilities – consistently lead to periodic skirmishes. As Aniket Ullal, head of ETF research and analytics at CFRA Research, explained, “All three countries will end up having minor skirmishes at times, and sometimes those escalate.” Ullal highlighted a relevant historical precedent: In 2019, India responded to a bombing in Kashmir with retaliatory strikes against Pakistan, triggering a period of heightened tension. However, the market reaction at that time wasn’t overwhelmingly bearish, suggesting that investors typically anticipate and account for such geopolitical risks within the emerging market landscape.
Despite the immediate market fluctuation, investors remain cautiously optimistic about India’s long-term growth prospects. India continues to exhibit stronger domestic growth compared to many other emerging markets, a key factor underpinning investor confidence. Furthermore, the country’s potential to benefit from the tariff regime implemented during the Trump administration’s trade policies—which primarily targeted China—remains a significant consideration. While the full impact of this policy is yet to be realized, analysts believe that it could further enhance India’s economic trajectory over the longer term. The market’s relative lack of panic indicates a belief that India and Pakistan have historically managed to navigate their disputes, and that the economic stakes are too high for either nation to escalate the situation beyond a manageable level unless an unforeseen event occurs.
Several India-focused ETFs demonstrate this continued confidence in domestic economic growth. The $316 million Columbia India Consumer ETF (INCO) is down 0.6% year-to-date but boasts impressive five-year annualized returns of 20.6%. Similarly, the $699 million iShares India 50 ETF (INDY) is up 4.7% year-to-date and up 16.4% on a five-year basis. These ETFs concentrate on investments within India’s robust consumer market, which has experienced substantial expansion. Investors appear to be recognizing that while geopolitical uncertainty is present, India’s underlying economic fundamentals—including its demographic advantages, growing middle class, and strategic trade policies—are compelling reasons to maintain a long-term outlook on the country’s investment potential. The market’s reaction to the latest events underscores the nuanced relationship between geopolitical risk and investment strategy, particularly within the dynamic emerging market context.
