Capitalizing on Contrasting Momentum: INDA and MCHI as a Strategic Pair in 2025–2026

In 2025, global investors face a complex macroeconomic landscape shaped by divergent monetary policies, trade tensions, and uneven growth trajectories. Against this backdrop, the iShares MSCI India ETF (INDA) and the iShares MSCI China ETF (MCHI) emerge as compelling candidates for a strategic pairing. While both ETFs represent emerging markets, their contrasting risk-adjusted returns, macroeconomic sensitivities, and growth dynamics position them to balance volatility and capitalize on regional opportunities. This analysis explores how investors can leverage their divergent characteristics to optimize risk-adjusted returns in the 2025–2026 period.

Risk-Adjusted Returns: A Tale of Two ETFs

INDA and MCHI exhibit stark differences in risk-adjusted performance. INDA's 12-month return of -2.87% and a Sharpe ratio of -0.19 highlight its suboptimal short-term risk-adjusted returns according to PortfolioLab data. However, its 5-year Sharpe ratio of 0.80 suggests stronger long-term resilience, driven by India's structural reforms and GDP growth of 6.5% in fiscal 2026. Conversely, MCHI has faced deeper challenges, with a maximum drawdown of -62.95% and a 5-year annualized return of 4.68% according to PortfolioLab comparison data. Despite recent bullish momentum, its volatility (3.69%) remains higher than INDA's (3.35%) according to PortfolioLab comparison data.

The Sortino ratio further underscores INDA's appeal: while it underperforms in balancing risk and reward, its focus on India's large-cap equities and broad diversification mitigates downside risk compared to MCHI's concentrated exposure to China's cyclical sectors. For investors prioritizing stability, INDA's 10-year annualized return of 7.26%-though trailing the S&P 500's 11.74%-aligns with India's long-term growth narrative according to PortfolioLab data.

Macroeconomic Sensitivities: Divergent Exposures

The macroeconomic profiles of INDA and MCHI diverge significantly. INDA's performance is influenced by India's accommodative monetary policy, with the Reserve Bank of India (RBI) cutting rates by 125 bps in 2025 to stimulate growth. This contrasts with the U.S. Federal Reserve's "higher for longer" rate stance, which has amplified borrowing costs and inflationary pressures globally. INDA's beta to U.S. interest rates appears moderate, as India's policy rate remains insulated from U.S. rate hikes due to its independent inflation dynamics according to trading economics data.

MCHI, however, faces heightened sensitivity to U.S. monetary policy and trade tensions. Its beta of 1.11 indicates greater volatility than the broader market according to AAIi data, exacerbated by U.S. tariffs on Chinese goods and geopolitical uncertainties. For instance, U.S. tariffs on Indian exports peaked at 50% in 2025, yet India's economy grew 8.2% year-over-year, showcasing resilience. Meanwhile, China's export-driven model remains vulnerable to global demand shifts and overcapacity risks according to SP Global research.

Commodity price dynamics further differentiate the two. India's commodities market, projected to reach $1.61 trillion in 2025, benefits from urbanization and industrialization. INDA's exposure to India's energy and metals sectors may thus offer hedging potential against commodity-linked inflation. MCHI, while indirectly influenced by commodity prices through China's manufacturing sector, lacks the same direct linkage .

Strategic Pairing: Balancing Volatility and Growth

The moderate historical correlation of 0.49 between INDA and MCHI according to PortfolioLab data suggests that pairing them can diversify a portfolio's risk profile. During periods of U.S. rate hikes, INDA's resilience to domestic monetary policy may offset MCHI's sensitivity to global liquidity shifts. For example, while MCHI declined 60% from its 2021 peak, INDA's broader diversification and focus on India's consumption-driven growth provided a counterbalance.

Moreover, India's declining equity correlation with U.S. markets offers genuine diversification benefits during market stress . This is critical in 2025, as global trade tensions and Fed policy uncertainty persist. A strategic allocation could tilt toward INDA during U.S. rate-cutting cycles, leveraging India's 7.8% Q1 2025 GDP growth, while maintaining MCHI exposure to capitalize on China's potential policy-driven rebounds.

Conclusion: Navigating 2025–2026 with a Dual-ETF Strategy

The contrasting momentum of INDA and MCHI reflects divergent macroeconomic narratives. INDA's long-term growth potential and moderate risk profile make it a cornerstone for investors seeking exposure to India's structural reforms and consumption boom. MCHI, despite its volatility, offers access to China's cyclical sectors and potential rebounds from policy easing. By strategically pairing these ETFs, investors can hedge against regional risks while capitalizing on growth asymmetries in 2025–2026.

As the Fed's "higher for longer" policy and trade dynamics evolve, a dual-ETF approach rooted in risk-adjusted return analysis and macroeconomic positioning will be essential for navigating the uncertainties ahead.