American investors looking to diversify their portfolio to include international stocks can do so easily by purchasing shares of American Depository Receipts (ADR). These shares trade on U.S. stock exchanges and are priced in dollars, yet they represent shares of the foreign company. ADR prices tend to move in tandem with their foreign counterparts.

While adding exposure to international equities can add the benefits of diversification and the potential for higher portfolio returns, each individual company and the country within which it operates carries unique risks and circumstances that must be carefully considered. (For more, see: Understanding The Risk In The BRICs.)

Indian ADRs

Companies in India have done very well over the last 20 years. The Indian economy is one of the fastest growing emerging markets, and India is the largest democracy in the world. Despite the fact that the Indian economy and population are large, only a relative few sponsored ADRs are listed on U.S. exchanges. (For more, see: India Is Eclipsing China's Economy As Brightest BRIC Star.)

Allocating a portion of international stocks to a portfolio can help augment return while reducing overall risk if the correlation between the two markets is less than one. Modern portfolio theory teaches that diversification benefits a portfolio as the correlations of the assets held in it diverge, meaning the less that asset prices move in tandem the greater the benefit. Correlations close to 1.0 would indicate that the prices of those assets move largely in the same direction by the same magnitude at the same time, while correlations close to 0.0 would indicate that there is no statistical relationship between the price movements of the assets.

Since 2009, the correlation between the broader U.S. and Indian stock markets has been +0.29, meaning that it offers some very good diversification potential. 

American investors looking to gain exposure to Indian companies might consider the following ADRs, ranked by market capitalization:

Company Ticker Industry Market Cap ($USD billions)
Infosys INFY Software, Computers 38.49

HDFC Bank

HDB Financial, Banks 36.87
ICIC Bank IBN Financial, Banks 33.72
Tata Motors TTM Automotive, Industrial 25.98
Wipro, Ltd. WIT Information Technology 22.97
Sesa Sterlite SSLT Metals & Mining 11.58
Dr. Reddy's Laboratories RDY Pharmaceuticals 9.36

WNS Holdings

WNS Business Services 1.11
Sify Technologies SIFY Internet 0.28
Rediff REDF Internet 0.06

Source: BNY Mellon, data as of 12/5/2014

Exchange Traded Funds (ETFs) that track the broader Indian stock market or track the currency (Indian Rupee) are also tradeable on U.S. Stock markets:

Description Ticker
Wisdom Tree India ETF EPI
Powershares India ETF PIN
Direxion India Bull 2x ETF INDL
Wisdom Tree Indian Rupee ETF ICN
Market Vectors Indian Rupee/USD ETN INR

The Bottom Line

India (the 'I' in the so-called BRIC countries) is one of the largest economies and has exciting growth potential. According to the Asian Development Bank's (ADB) report titled Asia Capital Markets Monitor, the equity market in India, with a market capitalization of over US$ 1,500 billion, has emerged as the third largest equity market, behind China and Hong Kong, in the emerging Asian region.

Adding ADRs or international ETFs to an investment portfolio can help with diversification, increasing potential returns while minimizing overall portfolio risk. The less each foreign market is correlated with the U.S. market, the greater diversification potential for a portfolio. Any one individual foreign stock or even individual countries pose their own unique risks that must be considered. The political and economic climate of each country varies and can be volatile, especially in emerging markets.

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