More Ways to Invest in India

By Amy Bickers

India is one of the great economic growth stories of the 21st century. The nation has undergone an astonishing transformation over the past 17 years, as the government has shifted away from socialism and opened and reformed its economy. Today, India (along with China) is one of the fastest-growing countries in the developing world.

India's powerful economic growth, coming from expansion in both services and manufacturing, is a strong indicator of its burgeoning economic clout. According to the government, gross domestic product in India expanded by 9.6% in 2007 and 9.4% in 2006, helping to make the economy the world's 12th largest.

Fueling the expansion has been rapid growth in services, including call centers, software design and back-office out-sourcing. The ability of Indian companies to design and produce well-made goods at a fraction of U.S. costs has also helped India become a major exporter.

The booming economy, hefty corporate profits and an unprecedented flow of foreign investment have propelled a spectacular surge in Indian share prices. Over the past five years through February 20, the Bombay Stock Exchange's 30-stock Sensitive Index, or Sensex, returned an annualized 40% (that return is in India's currency, the rupee). Real estate, banking and information-technology stocks have been at the forefront of the boom.

The outlook for the Indian economy remains bright, but the picture for Indian stocks is murkier. Volatility has increased amid concerns about the global credit crunch and the rupee's strength against the dollar, which hurts Indian exporters. Year-to-date through February 20 the Sensex has lost 13%.

Meanwhile, the fund industry is supplying U.S. investors with an expanding range of choices for investing in India. The first of two exchange-traded funds that focus on India is due to launch on February 22, and the second one is expected to follow quickly.

ETFs, which trade just like stocks, are funds that hold pools of securities and are designed to follow a specific index. They include mechanisms designed to keep the funds' share prices close to the value of their underlying assets.

Emerging from the gate first is WisdomTree India Earnings. Relative stock weightings in this ETF, like others from WisdomTree, will be based on a company's earnings rather than market capitalization. The ETF (symbol EPI) will draw from a universe of 150 profitable Indian companies that WisdomTree will reviewed annually.

WidsomTree's research director, Luciano Siracusano, says it's important for investors to consider the fund in the context of their overall investment plan. "People need diversity by having exposure around the world," he says. "But investing in India and other emerging markets should be done in the context of a larger global asset allocation model."

Also due out soon is PowerShares India Portfolio ( PIN). This ETF, which is scheduled to start trading before March 1, will track an index of 50 stocks developed by Indus Advisors. The index is designed to represent the overall Indian stock market.

Exchange-traded notes are similar to ETFs. But instead of owning a basket of stocks, as ETFs do, ETNs are a type of debt instrument that's linked to the performance of an underlying index.