|
YOU ARE HERE: ETFs » Our ETF Picks » Emerging Markets
Barchart.com ETF ResearchBarchart.com's Picks in the Emerging Markets ETF Research written by the Barchart.com ETF Research Team Last Updated: December 15, 2011 Table of Contents
IntroductionThe emerging world’s economies are growing much more quickly than the developed world’s economies and therefore present attractive business opportunities. China’s economy, for example, has been growing at an average annual rate of 9.5% over the last 10 years compared with only +1.6% for the U.S. and +1.4% for Europe. There are literally billions of people in the emerging world that are rising up from poverty. These upwardly mobile people need better food, shelter, transportation, consumer products, and services. What countries are included in the term “emerging markets?” The best known are Brazil, Russia, India and China because that group has been made famous by the “BRIC” acronym. South Korea is also considered to be an emerging market despite its advanced industrial base and is included in the acronym “BICK,” which refers to Brazil, India, China and South Korea. There are, however, many other countries that are included in the emerging markets category. The MSCI Emerging Markets Index (Bloomberg symbol: NDUEEGF), which is the most widely-tracked index by emerging market ETFs, holds stocks from 22 different countries. This list includes:
The largest country weights in the MSCI Emerging Markets Index are: Brazil (14.7%), South Korea (13.4%), China (12.6%), Taiwan (11.6%), and South Africa (8.0%). The emerging market ETFs cover the full spectrum of industry sectors. The MSCI Emerging Markets Index, for example, includes stocks from all the different industry sectors and has the largest weights in the following industry sectors: Banks (15.3%), Oil & Gas (11.4%), Telecom (9.3%), Mining (6.3%), Diversified Financial Services (4.3%), and Chemicals (4.0%). There are a wide variety of ETFs that focus on the emerging markets. We will first cover the ETFs that broadly cover all the emerging markets in a single ETF. We will then cover ETFs that focus on specific regions such as BRICs, BICKs, eastern Europe, Asia, Latin America, and Africa. We will then cover the two ETFs that focus on the “Frontier” countries, which are the smallest countries of the developing world. Finally, we will cover emerging market ETFs that focus on specific industry sectors such as infrastructure and consumers. We should note that this report will only cover multi-country emerging market ETFs. This report will not cover single-country ETFs such as an ETF that hold companies from a single emerging country such as China.
Broad Emerging Market ETFsVanguard MSCI Emerging Markets ETF (VWO) (issuer web site link) – This fund, launched in March 2005, has $42 billion in assets under management. The fund has an expense fee of 0.22%. The fund tracks the MSCI Emerging Markets Index. The fund holds 910 globally-listed stocks. The five top holdings as of September 30, 2011 were: China Mobile (2.0%), American Movil (1.5%), Gazprom (1.5%), Taiwan Semiconductor (1.1%), and CNOOC (1.0%). iShares MSCI Emerging Markets Index Fund (EEM) (issuer web site link) – This fund, launched in April 2003, has $33 billion in assets under management. The fund has an expense fee of 0.68%. The fund tracks the MSCI Emerging Markets Index. The fund holds 856 globally-listed stocks. The five top holdings as of October 31, 2011 were: Samsung (2.8%), Gazprom (1.8%), China Mobile (1.6%), Petroleo Brasileiro (1.5%), and American Movil (1.5%). PowerShares FTSE RAFI Emerging Markets Portfolio (PXH) (issuer web site link) – This fund, launched in September 2007, has $400 million in assets under management. The fund has an expense fee of 0.85%. The fund tracks the FTSE RAFI Emerging Markets Index. The fund holds 312 globally-listed stocks. The five top holdings are: Gazprom (3.6%), Lukoil (3.2%), China Mobile (2.6%), Taiwan Semiconductor Manufacturing (2.4%), and Infosys (2.4%). Schwab Emerging Markets Equity ETF (SCHE) (issuer web site link) – This fund, launched in January 2010, has $370 million in assets under management. The fund has an expense fee of 0.25%. The fund tracks the FTSE All Emerging Index. The fund holds 563 globally-listed stocks. The five top holdings are: Petroleo Brasileiro (2.2%), Taiwan Semiconductor Manufacturing (2.1%), China Mobile (1.9%), Gazprom (1.7%), and America Movil (1.7%). PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) (issuer web site link) – This fund, launched in December 2007, has $170 million in assets under management. The fund has an expense fee of 0.90%. The fund tracks the Dorsey Wright Emerging Markets Technical Leaders Index. The fund holds 101 globally-listed stocks. The five top holdings are: Kia Motors (3.3%), Charoen Pokphand Foods (3.0%), CJ O Shopping (2.6%), Alfa S.A.B. (2.1%), and Samsung Engineering (2.0%). SPDR S&P Emerging Markets ETF (GMM) (issuer web site link) – This fund, launched in March 2007, has $135 million in assets under management. The fund has an expense fee of 0.59%. The fund tracks the S&P Emerging BMI Index. The fund holds 554 globally-listed stocks. The five top holdings are: Gazprom (3.6%), Taiwan Semiconductor Manufacturing (2.8%), China Mobile (1.8%), Vale (1.8%), and American Movil (1.8%). Figure 1: Comparison of largest Emerging Market ETFs (live chart link)
Our pick for an Emerging Market ETF – Our pick for this group is the Vanguard MSCI Emerging Markets ETF (VWO). As seen in Figure 1, the performance of the four largest emerging market ETFs is very similar due to similar top holdings, which means that performance is not the primary criteria in choosing the best ETF in this group. Both Vanguard’s VWO and iShares MSCI Emerging Markets Index Fund (EEM) have a huge amount of assets and liquidity and both track exactly the same index, the MSCI Emerging Markets Index. However, we are choosing Vanguard’s VWO because its expense fee of 0.22% is a third of the 0.68% fee for iShares’ EEM. In addition, Vanguard follows a full replication strategy for the underlying MSCI Emerging Markets Index as opposed to iShares’ EEM which follows an optimization strategy of tracking the index as closely as possible while not holding all the stocks in the index. This means that Vanguard’s VWO should almost always show a lower tracking error to the underlying index than iShares EEM. Vanguard’s VWO may periodically show slightly better or worse performance than iShares EEM, but Vanguard over the long-run should show better performance because of its lower fee and should more closely match its intended benchmark. Leveraged Long Emerging Market ETFsThere are three leveraged long emerging markets ETFs, but only the Direxion Daily Emerging Markets Bull 3X Shares (EDC) has a level of assets under management that is above our suggested minimum level of $50 million. Direxion’s EDC tracks the MSCI Emerging Markets Index, which means that it should provide approximately three times the daily return (both positive and negative) of the unleveraged Vanguard MSCI Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM), both of which also track the MSCI Emerging Markets Index. Direxion Daily Emerging Markets Bull 3x Shares (EDC) (issuer web site link) – This fund, launched in December 2008, has $400 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks three times the daily price performance of the MSCI Emerging Markets Index. ProShares Ultra MSCI Emerging Markets (EET) (issuer web site link) – This fund, launched in June 2009, has $25 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks twice the daily performance of the MSCI Emerging Markets Index. Direxion Daily BRIC Bull 3X Shares (BRIL) (issuer web site link) – This fund, launched in March 2010, has $4 million in assets under management. The fund has an expense fee of 0.95%. As of December 1, 2011, the fund started tracking three times (3X) the daily price performance of the BNY Mellon BRIC Select ADR Index. Prior to December 1, 2011 the fund was called the “Direxion Daily BRIC Bull 2X Shares” and tracked two times (2X) the daily price performance of the BNY Mellon BRIC Select ADR Index.Short Emerging Markets ETFsAll four of the short Emerging Markets ETFs, except for the Direxion Daily BRIC Bear -3X Shares ETF, have assets under management that exceed our suggested minimum of $50 million. The Proshares -1X (EUM) and -2X (EEV) ETFs and Emerging Market’s -3X ETF all track the inverse of the MSCI Emerging Markets Index and all have the same expense fee of 0.95%. This means that the choice between these three ETFs comes down to whether an investor is looking for short exposure of -1X, -2X or -3X. Proshares Short MSCI Emerging Markets (-1X) (EUM) (issuer web site link) – This fund, launched in October 2007, has $280 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks the inverse of the daily performance of the MSCI Emerging Markets Index. Emerging Markets Bear -3x Shares (EDZ) (issuer web site link) – This fund, launched in December 2008, has $110 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks three times the inverse (-3X) of the price performance of the MSCI Emerging Markets Index. ProShares UltraShort MSCI Emerging Markets (-2X) (EEV) (issuer web site link) – This fund, launched in October 2007, has $80 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks twice the inverse of the daily performance of the MSCI Emerging Markets Index. Direxion Daily BRIC Bear -3X Shares (BRIS) (issuer web site link) – This fund, launched in March 2010, has $4 million in assets under management. The fund has an expense fee of 0.95%. The fund as of December 1, 2011, started tracking three times the inverse (-3X) of the price performance of the BNY Mellon BRIC Select ADR Index. Prior to December 1, 2011, the ETF was named the “Direxion Daily BRIC Bear 2x Shares” and sought two times the inverse (-2X) of the price performance of the BNY Mellon BRIC Select ADR Index.
Emerging Markets – BRIC and BICKiShares MSCI BRIC Index Fund (BKF) (issuer web site link) – This fund, launched in November 2007, has $810 million in assets under management. The fund has an expense fee of 0.69%. The fund tracks the MSCI BRIC Index. The fund holds 331 globally-listed stocks of companies that are headquartered in Brazil, Russia, India or China. The five top holdings are: Gazprom (3.9%), China Mobile (3.6%), Petrobras (3.2%), Vale (3.0%), and Itau Unibanco (2.8%). The country weights are 36.4% on China, 32.9% on Brazil, 15.5% on India, and 14.3% on Russia, and some residual on Hong Kong and the U.S. The top industry sector weights are 27.2% on Financials, 24.2% on Energy, 12.9% on Materials, and 7.3% on Consumer Staples. Guggenheim BRIC ETF (EEB) (issuer web site link) – This fund, launched in September 2006, has $500 million in assets under management. The fund has an expense fee of 0.60%. The fund tracks the Bank of New York Mellon BRIC Select ADR Index. The fund holds 92 globally-listed stocks of companies that are headquartered in Brazil, Russia, India or China. The five top holdings are: Petroleo Braileiro/A Shares (7.7%), China Mobile (7.4%), Vale (6.8%), Petroleo Brasileiro (6.4%), and Cia de Bebidas das Americas (5.0%). The fund has a 49.3% weight on Brazil, 31.4% on China, 11.5% on India, 1.3% on Russia, and the rest of the weight on other countries. The top industry sector weights are 24.9% on Energy, 17.2% on Financials, 15.4% on Telecom, and 15.3% on Materials. SPDR S&P BRIC 40 ETF (BIK) (issuer web site link) – This fund, launched in June 2007, has $410 million in assets under management. The fund has an expense fee of 0.50%. The fund tracks the S&P BRIC 40 Index. The fund holds 39 globally-listed stocks of companies that are headquartered in Brazil, Russia, India or China. The five top holdings are: Gazprom (8.9%), China Mobile (6.6%), China Construction Bank (6.4%), Itau Unibanco (5.2%), and Petrol Brasileiros (5.2%). The fund has a heavy weight on Energy (34%) and financials (32%). The fund has a 47.8% weight on China, 24.9% on Brazil, 19.1% on Russia, and 8.2% on India. First Trust Bick Index Fund (BICK) (issuer web site link) – This fund, launched in April 2010, has $45 million in assets under management. The fund has an expense fee of 0.64%. The fund tracks the ISE BICK Index. The fund holds 89 globally-listed stocks of companies that are headquartered in Brazil, India, China or South Korea. The five top holdings are: Makemytrip (2.4%), Infosys Technologies (2.2%), Tata Motors (2.1%), Wipro (2.0%), and Dr. Reddy’s Laboratories (1.9%). Figure 2: Comparison of the BRIC and BICK ETFs (live chart link)
Our pick for a BRIC ETF -- There are three ETFs that focus on the “BRIC” countries, i.e., Brazil, Russia, India, and China. All of these BRIC ETFs have sufficient assets under management for consideration as an investment recommendation. Our pick for the BRIC group is the SPDR S&P BRIC 40 ETF (BIK) because it currently has the best performance on both the monthly chart (see Figure 2) and the weekly chart and has the lowest expense fee of 0.50%. However, we have three caveats on SPDR’s BIK ETF: (1) there are only 40 stocks in the ETF, which means it does not have a high degree of diversification, (2) the fund is heavily weighted in Energy (34%) and Financials (32%), and (3) the fund is heavily weighted towards China (47.8%) and Brazil (24.9%). While the iShares MSCI BRIC ETF (BKF) has more evenly balanced weightings than SDPR’s BIK, its performance has not been as good. Our objection to the Guggenheim BRIC ETF (EEB) is that it has a particularly heavy weighting on Brazil (49.3%) and Petroleo Brasieiro (Brazil’s national oil company) at 14.1% (including both share classes). There is also a “BICK” ETF, which is the First Trust Bick Fund (BICK). This BICK ETF invests in Brazil, India, China, and South Korea. We would actually prefer to invest in a BICK fund rather than a BRIC fund, swapping South Korea for Russia because Russia in our view is hobbled by its Soviet legacy and government obstacles for business. South Korea, on the other hand, is one of the Asian Tigers that has proven itself as an industrial powerhouse. The problem, however, is that the First Trust Bick Fund (BICK) currently has assets under management that is below our suggested minimum of $50 million. Our general view of the BRIC and BICK ETFs is that investors would be better off going with the broad Vanguard Emerging Markets ETF (VWO) than with the BRIC ETFs. The acronym “BRIC” was coined by Jim O’Neil of Goldman Sachs and is a short-hand way of referring to the emerging markets. The BRIC countries, however, are really just a subset of a broad range of emerging markets. For our money, we would prefer the broader exposure and diversification of Vanguard’s VWO which provides a better representation of the emerging markets by investing in 22 different countries.
|
