Which India ETF Is Best?

In addition to diversified emerging markets funds and BRIC ETFs, which generally make a significant allocation to Indian equities, there are a number of ETFs that invest exclusively in India’s stock market:

iPath MSCI India ETN (INP)

The largest exchange-traded product offering exposure to Indian stocks, INP is actually structured as an exchange-traded note (ETN). Instead of holding a basket of securities that make up the relevant benchmark (in this case the MSCI India Index), ETNs are structured as senior, subordinated debt instruments. As such, holdings in INP expose investors to default risk.

Introduced in 2006, INP was the first ETP to offer exposure to Indian markets and now has a total market capitalization of more than $1.2 billion. Average daily volume of more than a half million shares is attractive, but the highest expense ratio in the group and the potential drawbacks of the ETN structure are causes for concern.

WisdomTree India Earnings Fund (EPI)

WisdomTree is known for its line of fundamentally-weighted ETFs, and EPI is one of the issuer’s most popular products. The index underlying this ETF is designed to measure the performance of companies incorporated and traded in India that are profitable. Companies selected for inclusion are weighted based on their earnings in the prior fiscal year, meaning that those with negative earnings are excluded and those near break-even are given a minimal weighting.

Due to the weighting methodology of EPI, this fund gives a larger allocation to small and mid cap stocks than other India ETFs. Although large cap stocks receive the largest allocation in EPI, this fund does maintain exposure to firms of all sizes, as companies with a market capitalization of less than $10 billion account for more than 40% of total holdings.

PowerShares India Portfolio (PIN)

PowerShares’ India ETF is based on the Indus India Index, a benchmark composed of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges: 200 from the Bombay Stock Exchange and 200 from the National Stock Exchange. From this universe of potential components, Indus utilizes a proprietary rules-based methodology to determine its holdings.

For cost conscious investors, PIN offers the cheapest way to gain exposure to Indian equity markets, charging an expense ratio of just 78 basis points.

iShares S&P India Index Fund (INDY)

iShares’ INDY is the latest India ETF to hit the market, launched in November 2009 to track the performance of the S&P CNX Nifty Index. The “Nifty Fifty” is the leading index for large companies listed on India’s National Stock Exchange, offering exposure to all sectors of the economy.

Investors looking for large cap exposure may like INDY, but its relatively high expense ratio and concentration among major holdings are potential drawbacks.

India ETFs Head-to-Head

While the four ETFs profiled above are similar in many respects and generally exhibit strong correlation with one another, they are far from identical. Differences in depth of exposure, expenses, weightings methodologies, sector allocations, and concentrations among mega-cap firms are among the factors to be considered when choosing an India ETF (click image to enlarge):

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