iShares Plans New Type of Emerging Market ETFs

2014 continues to see rough trading in the emerging markets. The onset of QE taper and concerns about a slowdown in the Chinese economy have led to panic in the developing corners of the world (read: 3 ETFs Tumble Most on Emerging Market Sell-Off).

However, even amid such worries, issuers are not abstaining from filing funds focused on these nations. Most recently, iShares has filed for two ETFs focusing on the emerging market space.

Proposed Funds in Focus

Though both of the funds – iShares MSCI USA with EM Exposure ETF and the iShares MSCI World Ex USA with EM Exposure ETF – look to focus on the emerging markets, there is a slight difference between the two.

The iShares MSCI USA with EM Exposure ETF looks to track the performance of companies in the U.S. that derive the highest proportion of their revenues from emerging markets. However, the iShares MSCI World Ex USA with EM Exposure ETF focuses on developed market equities, excluding the U.S., which derive the highest proportion of revenues from the emerging markets.

The two passively managed funds track the MSCI USA with EM Exposure Index and the MSCI World ex USA with EM Exposure Index, respectively (see all the World ETFs here).

While the index for the MSCI World Ex USA with EM Exposure ETF focuses on the top 100 companies with the highest economic exposure to the emerging markets, the MSCI World Ex USA with EM Exposure ETF includes the top 250 companies.

Sector-wise, the USA fund primarily seeks to include companies from the consumer staples, energy and information technology sectors, while the Ex USA fund will focus more on consumer staples, financial and materials companies.

Region-wise, the index for the Ex-USA fund consists of companies from Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

Both the funds include stocks from the entire spectrum of market capitalization levels.

How could it fit in a portfolio?

The end of the Fed’s stimulus program is causing turbulence in many emerging markets. The exit by foreign investors from these markets has led to massive capital outflows, which have sent their currencies to multi-year lows (read: Can Rate Hikes Save these Emerging Market ETFs?).

Not only are external factors plaguing the emerging markets, countries like Turkey, Brazil, Indonesia, India, South Africa, Argentina and Ukraine are struggling with their own set of internal problems.

However, to fight these problems many emerging markets including Turkey, South Africa and India have resorted to rate hikes and structural reforms. Considering the fact that emerging markets account for about 55% of global GDP, the current sell-off in these nations has created good buying opportunities for investors.

Thus, the two proposed products could be interesting picks for investors who want to use the recent sell-off to build positions in the emerging market space (read: Emerging Market ETFs: Any Bright Spots?).

ETF Competition

Though there are no direct competitors for the above two products, Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM) dominate the emerging market space.

While VWO manages an asset base of $40.7 billion, EEM has an asset base of $31.3 billion. The funds within this space charge an expense fee ranging from 0.15% to 1.29%.

Beyond these ultra-popular names, the emerging market ETF space is flooded with other products as well. Investors can also look for WisdomTree Emerging Markets High-Yielding Equity Fund (DEM), iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV) and WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) among others (all the Emerging Market ETFs here).

However, this is the first such product to take a developed market approach to emerging market ETF investing. This technique might be lower risk, and it could be a solid idea for investors who want to get in on the space, but are worried about buying up shares in local markets, making either of these proposed funds potential winners should they clear regulatory hurdles and make it to the market.

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