After being shunned in the risk-off, volatile market environment over 2011, India exchange traded funds are making up the difference on a combination of improved market conditions and an appreciating rupee.

The largest India ETF, WisdomTree India Earnings Fund ETF (NYSEArca: EPI), is up 31.9% year-to-date. EPI allocates 24% of holdings to its financial sector. Zacks research firm believes that since a large portion of the population is not using banks, the banking sector still has an opportunity to expand. [ETF Chart of the Day: India]

India’s stock market has returned 13.9% year-to-date in the local currency, but for international investors, the returns have exceeded 25% in 2012 – the Indian rupee has appreciated almost 8% in January against the U.S. dollar, according to Zacks Investment Research on NASDAQ. Most country-specific ETFs do not hedge currency risks, so currency appreciations provide an extra kick while currency depreciation will drag on the funds.

With the U.S. economy expanding at a meager pace and the Eurozone problems tentatively contained, global investors are returning to areas that saw valuations drop from last year’s exodus. [BRICs Lead Emerging Market ETFs]

India’s central bank recently diminished its cash reserve on banks by 0.5% and cautions that upside risks to inflation remains. The central bank also relaxed foreign investment restrictions, which is helping to attract foreign investors.

Zacks warns that Indian stocks are highly volatile and their performance depends on foreign institutional investors. The firm also cautions that the rupee is vulnerable to major capital inflows as their currency market is less liquid than others.

  • Powershares India Portfolio ETF (NYSEArca: PIN): up 24.9% year-to-date. PIN’s largest sectors holdings are energy, information technology and financials.
  • iShares S&P India Nifty 50 Index Fund ETF (NYSEArca: INDY): up 28.6% year-to-date. INDY’s top sector weightings are financials, information technology and energy.
  • iShares MSCI India Index Fund (NYSEArca: INDA): was launched on Feb. 2, 2012. INDA’s largest sector weightings include financials, information technology and energy.

WisdomTree India Earnings Fund ETF

For more information on India, visit our India category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.