Emerging Markets ETFs: Companies Just as Important as Countries

ETF Trends

When it comes to emerging markets ETFs, investors’ focus is often on the fund’s countries constituent countries more than the stocks that reside in the fund. Index providers and ETF issuers have taken advantage of the recent BRIC struggles to bring new indices and funds to market that reduce or exclude allocations to some large emerging markets.

In August, State Street Global Advisors filed plans with the Securities and Exchange Commission to possibly introduce the the SPDR MSCI Beyond BRIC ETF. The ETF would invest in developing-market stocks in Chile, Columbia, the Czech Republic, Indonesia, South Africa and Turkey, among others. Last year, Emerging Global Advisors introduced the EGShares Beyond BRICs ETF (BBRC) . BBRC, as its name implies, features no direct BRIC exposure. [State Street Could List Beyond BRICs ETF]

Although momentum is building for the beyond BRIC concept and more ETF issuers are limiting or excluding advanced markets like South Korea and Taiwan from fund rosters, investors are paying ample attention to what countries comprise emerging markets ETFs. However, some would argue the focus should be on what stocks are found in the ETF, not its country allocations.

“One of the reasons that the iShares MSCI Emerging Markets ETF (EEM) performed so poorly during the past three years is that it owns big multinational companies. Smaller stocks, meanwhile, benefited from investor focus on the developing world’s growing middle class,” reports Ben Levisohn for Barron’s.

There is something to be said for the out-performance of emerging markets small-caps over their large-cap brethren. Over the past three years, the Vanguard FTSE Emerging Markets ETF (VWO) is down nearly 2%, but the WisdomTree Emerging Markets Small-Cap Dividend ETF (DGS) is higher by 6%. [Small-Cap ETFs for Emerging Markets Exposure]

DGS only allocates about 15.4% of its weight to the BRIC nations, but 37% of its weight goes to advanced emerging markets Taiwan and South Korea. Ignoring the BRIC and steadier developing markets may not be the best approach in the term.

“But don’t make the mistake of eliminating the BRICs completely. After the recent selloff and more recent rally, it’s unclear whether investors will favor big companies or return to their bet on the emerging-market consumer—and which countries will outperform,” according to Barron’s.

Investors may be pleasantly surprised by the volatility factor with an ETF like DGS. Since its inception over six years ago, the underlying index for DGS has a beta of 0.92 against the MSCI Emerging Markets Index and annualized volatility that is 400 basis points below that of the MSCI Emerging Markets Small-Cap Index, according to WisdomTree data.

WisdomTree Emerging Markets SmallCap Dividend ETF

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DGS

 

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.

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.

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