When iPath’s MSCI India Index (INP) booked a 70% return for its NAV in 2007, both issuers and investors began focusing on specific ways to benefit from India’s growing economy. In response to the significant returns and growing demand, WisdomTree launched the India Earnings Fund (EPI) on February 21, 2008. In an attempt to grab a piece of the pie, PowerShares debuted the PowerShares India Index ETF (PIN) on March 3, 2008, a fund with a different methodology, fewer components and a lower expense ratio. We have not yet begun tracking PIN in the PowerShares Momentum Tracker newsletter but plan to offer it next quarter (6-month PIN chart - click to enlarge).

While these offerings certainly represent a growing interest and subsequent accessibility to India’s economy, the first half of 2008 has proven difficult for India’s investors and the country as a whole. Government data released on June 20 indicated that inflation had hit a 13-year high of 11.05%, exceeding economists’ expectations by more than 1%, while last year inflation was only 4.3% for the corresponding week. Despite the Reserve Bank of India’s June 11 rate hike, which brought repurchase rates to 8% to take aim at inflation, concerns have only increased as June draws to a close.

In addition to broader economic problems, specific glitches with iPath’s India ETN have made some investors wary. Late last October, India’s regulators reined in their booming economy by restricting types of foreign investment. The impact on iPath’s INP was swift. Barclays announced that they were suspending the issuance of additional units until they could wrap their minds around the new regulatory challenges. Supply and demand stepped in, causing the price of the existing shares of INP to trade at an astronomical premium to NAV. By late December, Barclays had updated their prospectus, while the IRS’s elimination of tax breaks associated with currency ETNs brought INP’s share price and NAV back in line.

EPI and PIN have taken a lesson from INP’s difficulties. The methodologies of both funds take into account restrictions that India’s government has placed upon foreign investment. This consideration, along with the inherent qualities that differentiate ETFs from ETNs, may help to bolster the appeal of these products in months to come. While INP provides investors with exposure to unsubordinated debt, EPI and PIN are made up of large-cap companies, many of which have receipts that trade on U.S. exchanges. The ability to partially hedge portfolio exposure during the U.S. trading day may alone provide security for risk-averse investors.

PIN tracks the Indus India Index, which is composed of 50 companies that trade on India’s two main exchanges: the National Stock Exchange and the Bombay Stock Exchange. PIN uses a weighting strategy that selects Indian equities with the highest investable market capitalization.

While PIN and EPI have six out of their top 10 components in common, investors should note a few key differences between the funds. EPI has 150 components, and while its strategy specifies a range of market capitalization of $2 billion to $10 billion for its holdings, the WisdomTree India Earnings Index is not primarily determined by market cap. PIN also has a lower expense ratio of 0.78, which is less than EPI’s 0.88.

Some professionals will certainly make the case that a greater number of components will provide investors with greater diversification. It is important when comparing these two funds, however, to take into consideration the weighting of each portfolio as a whole. While PIN has only 50 components, the top 50 components of EPI make up 87% of the portfolio’s total holdings. Investors will have to decide if the remaining 13% of EPI’s portfolio is truly enough to increase the diversification of the investment.

Since its debut three months ago, EPI has traded an average of 538,994 shares per day, in comparison to PIN, which has traded 35,711 per day, according to Yahoo! Finance. This difference can partially be explained by the fact that EPI was the first product to go to market. Some investors may also feel safer invested in a fund with a greater number of components.

While trading volume and diversity are certainly important factors, PIN’s lower expense ratio may be the factor that proves most valuable to investors in the long term. Even though EPI has more components, the majority of assets are invested in the top 50 holdings. Since exposure is similar in both funds, the tiebreaker in this case may be the expense ratio.

So, is it safe to begin looking to India again for returns? Despite infrastructure difficulties, PIN top holding Infosys Technologies (INFY) may find more room for growth in the near term. The tech bellwether has ties to Wal-Mart (WMT), which, some suggest, may expand its IT in India after this year’s election. Infosys also has continued to expand its Wal-Mart operations. In a recent interview with ANI, Infosys director and head of administration, education and research T.V. Mohandas Pai noted: “Infosys is hiring over 25,000 people this year, adding to the total of 91,000 people. [The] Bangalore campus has over 21,000 people, followed by 19,000 in Pune."

Other recent news may also help to boost the economy on the whole. On June 20—the same day as the release of the government report—Anheuser-Busch (BUD) announced it would increase its ownership in the Crown Beers India Ltd. joint venture by purchasing the 50% it doesn’t already own. Flooding, which recently displaced millions of civilians, could turn out to be a boon to crops. Decreased food prices could certainly help to combat inflation woes.

Revived talks of a U.S.-India nuclear deal have also left many hopeful that new policies allowing nuclear energy to be imported into India could be implemented before the November elections. While India’s communist parties have strongly opposed this deal in the past, India’s governing coalition is showing signs that they might break ties with the communists, despite the ongoing support they give the government. Any boost to nuclear imports could help PIN’s largest sector, energy, which comprises 27.93% of the portfolio.

While current market data may cause some risk-averse investors to stick to the sidelines, PIN’s comparatively low expense ratio, sector diversification and easy-to-grasp methodology may present the opportunity others have been looking for.