Two New India ETFs, No Obvious Winner

It's a good time for ETF investors who want exposure to India.

India has drawn a lot of attention in the last few years as an investment destination due to its large and young population, its approximate 9% annual GDP growth, strong but volatile stock market, strong currency and its expanding presence on the world economic stage.

There are two ETFs covering India that have listed in the last couple of weeks; the WisdomTree India Earnings ETF(EPI Quote) and the PowerShares India Portfolio(PIN Quote).

The difference between the two is simple to understand and has thus far created an apparent winner when judging by past peformance.

EPI is a fundamentally weighted index that screens and weights 150 companies by their earnings in the previous year. PIN is a market-cap-weighted fund that owns shares in the 50 largest companies in India. The difference in construction accounts for some noticeable, but not dramatic, sector differences.

EPI allocates 41% to resources (energy and materials) while PIN has 37% in this area. EPI is lighter in tech and telecom, 17% as opposed to 26% for PIN.

Both funds take some noticeable single-stock risk. Although neither is recklessly constructed, it is worth knowing that EPI allocates 13% to Reliance Industries; PIN allocates 10% each to Reliance and Infosys(INFY Quote).

	1 Year	3 year	5 year
EPI	90.32%	53.69%	57.54%
PIN	56.10%	47.40%	47.88%

I attribute EPI's superior past performance to the heavier weighting in resources, which has clearly been the place to be for the last few years. Looking forward, any meaningful commodity price correction will hit EPI a little harder than PIN.

I would expect that EPI would still be heavy in resources even if there were a decline, as commodity prices could come down quite a bit before taking the resource names off the top of the Indian earnings heap.

The decision of which one is better boils down to what you think will be more important.

In their current allocations EPI is more of a bet on what makes India tick internally as it modernizes and the quality of life improves (a large portion of the population does not yet have modern amenities).

PIN's heavier weight to technology and related services is more of bet on what India provides to the world and the future role in global economic order. My initial hunch is that EPI's focus of internal growth would continue to be the better choice.

There are plenty of risks, like with all emerging markets, to owning India. Inflation is on the rise (Lehman Brothers(LEH Quote) is looking for 6% later this year). Higher interest rates may not resolve the issue.

Additionally, GDP could drop to 8%. A large part of the India story has been built on outsourcing from the U.S. As the rupee has strengthened the cost advantages of outsourcing lessen and some companies could bring those jobs back.

I do not believe these threats will undermine the long-term promise, but shorter term could be a different story. The benchmark Sensex index is down more than 20% YTD.

One other obstacle could be the Indian government. It recently instituted controls on derivative products tied to the country's market that have impacted Barclays'(BCS Quote) ability to create more shares of its iPath MSCI India Index ETN(INP Quote). That contributed to INP trading as much as 15% above its net asset value. A similar move that would impact ETFs is unlikely, but anyone buying one of the ETFs should know the situation.

Now matter how you add India, know that an investment in India will add volatility to your portfolio. I would not exceed a 5% weight.