Are You There Investors? It's Us, India ETFs

India is the "I" in the ubiquitous BRIC acronym. It is Asia's third-largest economy behind China and Japan and the second-largest major emerging markets economy overall. The country is the world's largest democracy and second-largest by population.

In other words, it is hard to forget about India, but that may be exactly what investors are doing. At least on an asset allocation basis. At the end of the first quarter, there was $2.63 billion in assets under management at the various India-specific ETFs, according to WisdomTree data.

That sounds like a decent total, but it merely ranks India in the middle of the top-10 emerging markets for ETF assets. India is barely ahead of Taiwan, though not too far behind Mexico in terms of ETF AUM. However, the data indicate that Brazil, with an economy smaller than India's, has more than triple the ETF assets of India. At the end of the first quarter, there was nearly $10.1 billion in AUM in China-specific ETF, according to WisdomTree.

Of the $2.63 billion in AUM in India ETFs at the end of the first quarter, more than half was held by just two ETFs the $1.03 billion WisdomTree India Earnings Fund (NYSE:EPI) and the $460.1 million iShares India 50 ETF (NASDAQ:INDY).

"Based on economic size, it makes sense that China AUM ranks firstit's the largest economy on this list by a significant margin, whichever exchange rate measurement is used," said WisdomTree Research Director Jeremy Schwartz. "However, what makes less sense to us (again, just looking at the GDP data) is that South Korea and Mexico AUM are larger than India AUM and that the margin between Brazil AUM and India AUM is so great."

Indeed, it may be possible that investors are forgetting about India to some extent. Investors have been slow to warm to Indian rupee, a currency the International Monetary Fund recently said is 62 percent undervalued relative to the U.S. dollar. The WisdomTree Indian Rupee Fund (NYSE:ICN) is up almost 1.2 percent this year, a decent though not spectacular performance for a currency ETF.

When measuring India against nine other major emerging markets in terms average annual returns over 10 years, the country comes in sixth with an average annual return of 18.97 percent, according to WisdomTree.

That puts India just behind China and ahead of South Korea, Malaysia, Russia and Taiwan. The other countries that have outpaced India are, in order, Indonesia, Brazil, Thailand and Mexico. Part of the reason investors have not embraced Indian equities to the degree they have Chinese and Brazilian equivalents is perceived risk.

"Maybe India's equities are the most risky, or at least significantly more risky than those of Brazil, South Korea, Mexico and China, which would explain its relatively lower AUM," said Schwartz in a new research note.

Then again, investors have flocked to Brazil, which has the second-highest average annual standard deviation of the 10 aforementioned countries.

"India is widely known as being a high-volatility equity market, and while investors may use this as part of their rationale to avoid it, Brazil AUMeven given its higher risk levels over the past decadeis about three times higher," according to Schwartz.

Year-to-date, EPI and INDY have volatility measures above 20 percent, well above that of the iShares MSCI Emerging Markets Index Fund (NYSE:EEM), though only marginally higher than the volatility featured by the iShares FTSE China 25 Index Fund (NYSE:FXI) and the Market Vectors Russia ETF (NYSE:RSX). While EPI and INDY have not been stellar performers this year, both have easily outperformed FXI and RSX.

One reason Indian stocks and ETFs are having troubles this year is low correlations to U.S. equities. Of the 10 countries mentioned here, India had the lowest correlation to the S&P 500 Index over the past three years ending March 31, 2013, according to WisdomTree.

The combination of performance and GDP statistics might indicate investors are under-allocated to India, particularly if the Reserve Bank of India continues its accommodating monetary policy and the country is able to retain its investment-grade credit rating.

For more on India, click here.