Two years ago I expended considerable time and effort to find a way to invest in Indian companies on local Indian exchanges. Yes, we can buy ADS/ADRs on American exchanges and for some companies that do not trade in US, one may be able to buy GDRs on some European exchanges (depending on whether your broker is capable of executing these international trades). I called up Indian brokers with no luck. Called up the international trading desk with my US broker and they told me that they can transact on most exchanges in the world but not in India. Buying GDRs on European exchanges was always an expensive proposition

There were very few options to invest in Indian companies. Few Open ended mutual funds did exist (Eaton Vance (ETGIX) and the excellent Matthews India (MINDX) that came later). There were also a few close-ended funds (India Fund (IFN) and Morgan Stanley India Investment Fund (IIF)) but the expense ratios were always on the high side

My issues with all these options were that they were invariably overloaded with IT and Software names. While this industry has been the driver behind India’s past growth, I believed that the future growth in India will likely come from more basic industries such as materials, steel, cement, banking, communications, etc. Industries that are core to what can be the largest national infrastructure buildout (along with China) in the next decade or so

It has been a long time coming. Two new ETFs were launched recently that track indexes (separate and proprietary) based upon local Indian stocks on NSE and BSE exchanges. The expense ratios are also more reasonable now. The following is a brief introduction to these two ETFs. (If you are interested in these, please be sure to hope on to the respective sites and peruse the prospectii. A few links are provided for your dd pleasure)

1. Wisdom Tree India Earnings Fund (EPI) based on Wisdom Tree India Earnings Index

The fund tracks a proprietary index composed of profitable Indian companies weighted by Earnings. The index currently holds about 150 companies and therefore is well diversified. The expense ratio is a reasonable 0.88% and the top holdings and sector weightings are more to my liking

The fund started trading on NYSE ARCA in late February. Today’s quote is 23.94 and the NAV is around 23.4. It therefore trades at a slight premium to NAV

More Information about the fund is at the Wisdomtree site

More information about the index is here

2. Powershares India Portfolio (PIN) based on Indus India Index

This fund tracks a proprietary index based on the 50 largest companies in India and is market capitalization weighted. The expense ratio is 0.78% (besting the Wisdomtree ETF by 10 basis points) and its top 10 holdings are pretty similar to EPI (although the weightings are different)

The fund started trading today. The offer price was 25

More information on the Powershare fund can be had here

My take: I personally prefer the Wisdometree ETF despite its slightly higher expense ratio. First of all, its average PE ratio is about 17 compared to about 20 for PIN and about 27 for the Indian stocks as a whole. Secondly, EPI is more diversified across multi-caps and gives an exposure to the small and medium cap companies in India, which is where a lot of growth will occur. PIN has minimal small cap exposure and is not likely to have one based on how it index is constructed

A word of caution: These ETFs are very recent and it is generally wise to wait for sometime before buying into them. If you buy too early, you may end up paying a good premium to the NAV

Another word of caution: Investing in foreign markets is more risky than investing domestically (but than it is the same thing they tell you in India if you want to invest in American stocks …). Also you will be exposed to the currency fluctuations (which if you ask me is probably a good thing since I do expect the Indian Rupee to continue to strengthen against USD for the foreseeable future). There may be less transparency in the company financials in emerging markets (you know, as opposed to , let’s say, in US, assuming you ignore the current events here in the States). Etc, Etc.

Typically I avoid funds, instead choosing to buy individual stocks. However, I will make an exception here as these ETFs still remain the best way to buy into the Indian markets