WisdomTree’s fund, as its name implies, is based on an earnings-weighted index of 150 companies. It’s made up of companies listed on the Indian National Stock Exchange or the Mumbai Stock Exchange that issue ordinary common shares that are eligible for foreign ownership. Each company has a minimum $200 million market cap, $5 million in earnings in the fiscal year before the screening date and a price-to-earnings ratio (P/E) of at least 2. Each September, the index is rebalanced.
Because of India’s restrictions on foreign investment, the index’s creators aimed to build a broad index. The dividend payout ratio and dividend yield in the India stock market are among the lowest in the developing world, thus the decision to go by earnings.
The PowerShares fund, on the other hand, used a patent-pending proprietary method to build an index “as investable as possible” while getting around the country’s restrictions.
It’s made up of 50 of the largest Indian stocks, weighted by “IndusCap,” a methodology that specifically addresses the foreign ownership limits. PowerShares believes it will deliver a more accurate representation of the capitalization in each company than market-cap or float-weight.
Who will come out ahead as the top performer? Which index will work best with India’s complicated rules regarding foreign investing? Only time will tell on this one.