Three Overlooked Emerging Market ETFs - ETF News And Commentary
January 23 2012 - 4:27AM
Zacks
For many investors, the development of ETFs has been
instrumental in gaining exposure to quickly growing emerging
markets. These funds have allowed many to put assets to work in a
variety of countries cheaply and easily, greatly diversifying
portfolios from a geographic perspective in the process. In order
to gain this exposure, many investors have flooded into just a few
ETFs in the space as these funds control nearly all the assets in
the emerging market ETF world. In fact, two ETFs, VWO and EEM—which
both track the MSCI Emerging Markets Index—account for a whopping
$80 billion of assets in the space, far and away the leaders in the
emerging market sector.
This impressive total in these two funds-- which track the same
index-- suggests the vast majority of investors who have exposure
to emerging markets are doing so via one of these products. While
both of these funds do a great job of providing broad exposure to
some of the world’s largest and most liquid emerging markets, one
can definitely argue that they do not offer a complete picture of
the sector and leave something to be desired for many (Go Local
With Emerging Market Bond ETFs).
This is largely due to the fact that the funds remain heavily
concentrated in just a few nations limiting the broad appeal of the
ETFs as proxies for global emerging market performance. For
example, in VWO, four nations—China, Korea, Brazil, and Taiwan—make
up close to 58% of the total exposure in the fund while investments
in South Africa, Russia, and India combine for another 21% of
assets. This leaves roughly 20% for the rest of the emerging world
suggesting that investors are heavily concentrated in a few
countries and could stand to look at some national ETFs in order to
round out their emerging market exposure (read Top Three Emerging
Market Consumer ETFs). For these investors, we highlight three
emerging market ETFs below that could help to balance out exposure
to the developing world and help to dull some of the heavy
concentrations that are inherent in the two most popular ETFs in
the space (all GDP data is PPP and from the CIA World
Factbook).
Turkey ETF
Turkey is a rapidly growing country that often doesn’t get the
respect that it deserves. The country is one of the 20 largest
economies on earth and is close to breaking into the trillion
dollar club—and already has by some measures. Yet despite the
fact that Turkey has an economy larger than Australia or Taiwan,
the nation makes up just 1.3% of assets in VWO, a surprisingly low
percentage considering that Taiwan receives a double digit
allocation (read Five ETFs to Buy In 2012).
In order to increase exposure to this economy, a closer look at
the iShares MSCI Turkey Investable Market Index Fund (TUR) could be
warranted. The fund tracks the MSCI Turkey Investable Market Index
and gives exposure to nearly 100 securities in the Turkish market.
The fund is heavily exposed to financials (42%) of assets while two
defensive sectors—consumer staples and telecoms—round out the top
three. Total costs come in at a reasonable 59 basis points while
the 30 Day SEC yield is a pretty solid 2.6%.
Mexico ETF
Mexico is one of the largest economies in the world and has a
GDP of nearly $1.6 trillion; enough to put it in the top 15 and
just behind Italy. In fact, the country has a bigger economy than
South Korea although the Asian nation has three times the assets in
VWO than its Latin American counterpart. Clearly, Mexico, which is
the fifth biggest emerging market economy on Earth, should probably
have more in assets than what it receives in either of the major
emerging market ETFs (also read Time To Get Regional With Bond
ETFs).
If an investor is looking to rectify this situation, an iShares
ETF could be the way to gain more access to the economy quickly and
easily; the MSCI Mexico Investable Market Index Fund (EWW). The
product tracks publically traded securities in the Mexican market
by following the MSCI Mexico Investable Market Index. This produces
a fund that has just under 50 securities in total and one that
charges a relatively low 52 basis points in fees. Top sector
weightings include consumer staples (30%), telecom (22%) and
materials (15.9%) while many sectors do not receive any allocations
at all. In fact, close to 70% of the assets go towards the top ten
holdings and two securities, America Movil and Walmart de Mexico,
combine to make up nearly one-third of total assets by
themselves.
Philippines ETF
For investors looking for a smaller economy that has been
overlooked, the island nation of the Philippines could be worth a
closer look. The country has a $350 billion economy which means
that it is larger than Switzerland, Hong Kong, or Singapore. Yet
despite this size, the country makes up under 75 basis points in
VWO, practically a rounding error in total portfolio contribution
(read Inside The Vietnam ETF).
For those looking to ramp up assets in this overlooked country,
an allocation or a closer look at the MSCI Philippines Investable
Market Index Fund (EPHE) could be a good idea. The fund tracks a
benchmark of nearly 40 securities that are based in the country,
charging investors 59 basis points a year for its services. Top
allocations go towards financials (36.6%), industrials (22.7%) and
utilities (16.4%). Assets are reasonably well spread out across
individual securities as no one company makes up more than 9% while
the top ten assets take up close to 58% of all the assets.
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Author is long VWO.
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