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When Prime Minister Justin Trudeau rose in the House of Commons last month to accuse India of responsibility for the June murder of a Canadian citizen, he plunged relations between the two countries into a deep freeze.

Mr. Trudeau didn’t provide evidence for the accusation, presumably for security reasons. That left Canadians wondering what information CSIS, or the RCMP, or our allies may have imparted to him that was so compelling that he felt he must make a public statement.

What we do know is that the Indian government was enraged. India ordered dozens of Canadian diplomats out of the country (although that hasn’t happened yet), issued a warning against travel to Canada, suspended issuing visas to Canadians, put a freeze on trade negotiations, and generally bad-mouthed this country at every opportunity.

Whatever really happened, one thing is certain: this whole imbroglio is bad news for the Canadian economy. India now has the largest population in the world. It is a rising power, both politically and economically. In a report released last week, the International Monetary Fund raised its Indian growth forecast for the current fiscal year to 6.3 per cent from 6.1 per cent previously. That’s higher than the prediction for China.

Prior to Mr. Trudeau’s statement, Canada had identified India as “a priority market”. The Government of Canada website says relations between the countries were “built upon shared traditions of democracy, pluralism, and strong interpersonal connections”.

Last year, India was Canada’s 10th largest trading partner and Ottawa hoped to build on that by working toward comprehensive economic and investment agreements.

This was seen as a key foreign policy objective, and with good reason. According to the Indian Ministry of Commerce and Industry, foreign trade in the 2022-23 fiscal year was almost US$1.2-trillion. Of that, US$714-billion were imports. Canada’s share was so low it didn’t even rank among India’s top 10 importers. China was No. 1, sending more than US$90-billion worth of exports to India last year.

Ottawa had prioritized developing better trade relations in a wide range of fields, including nuclear energy, science and technology, agriculture, energy, transportation, and civil aviation. But after the developments last month, don’t expect much to happen for a long time – perhaps until there is a change of government in both countries.

Meantime, international investment is pouring into India. According to the Wall Street Journal, foreigners put US$8.3-billion into Indian equity funds between January and August of this year, the highest amount on record for the period. The Indian stock market is booming, especially in relation to that of one-time powerhouse China.

All this leaves investors with a dilemma. Do you want to invest in India right now, given the dark cloud cast by the Prime Minister’s accusations? If so, there are two Canadian-based ETFs worth considering.

The first is the iShares India Index ETF (XID-T). It invests in a portfolio of large-cap companies that is designed to track India’s benchmark “nifty fifty” index. The fund was launched in January, 2010 and has about $73-million in assets under management. Its MER is high for a passive fund, at 1.08 per cent.

Despite the high cost, returns are very good. The fund is up 8.11 per cent so far this year (to Oct. 12) and has a 10-year average annual compound rate of return of 12.26 per cent (to Sept. 30). While North American markets were being hammered in 2022, this ETF lost less than 1 per cent.

Based on these results and the growth forecasts for the Indian economy, XID looks promising for those seeking capital gains. Income investors should look elsewhere, however. The fund makes distributions only once a year, in December, and normally they are minimal to zero. The one recent exception was 2021 when the payout was $3.11 per unit.

The BMO MSCI India ESG Leaders Index ETF (ZID-T) takes a different approach. It tracks the MSCI India ESG Leaders Index, which in turn is based on the MSCI India Index of mid- and large-cap stocks. This makes it a socially responsible fund with screens that exclude companies that earn significant revenues from tobacco, alcohol, gambling, weapons, and nuclear power.

The fund was launched in January, 2010 and has $107-million in assets under management, with an MER of 0.67 per cent. Distributions are made annually in December but normally don’t amount to much.

There are 47 stocks in the portfolio, weighted by market capitalization. The largest positions are in Reliance Industries Ltd. (17.7 per cent) and Infosys Ltd. (12.09 per cent), which together make up almost a third of the portfolio. The largest sector holdings are information technology (29.48 per cent), financials (20.33 per cent), and energy (17.93 per cent).

Long term, this ETF has outperformed XID, with a 10-year average annual compound rate of return of just under 15 per cent. But it’s important to note the original mandate was quite different from the current ESG focus. Recently, ZID has underperformed XID, losing 4.43 per cent in 2022. It’s up 3.81 per cent so far in 2023 (to the end of September), but that is less than half of XID’s returns.

Bottom line: if you prefer to invest your money in assets with a high ESG score, choose ZID, which closed Monday at $40.34. If capital gains are your primary goal, XID is the better selection at the current price of $47.62.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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