When it comes to diversified emerging markets ETFs, two of the most important factors investors must evaluate are a fund’s country exposure and its country weights. Using a hypothetical example Emerging Markets ETF “A” with a 10% combined weight to the BRIC nations would likely be outpacing Emerging Markets ETF “B” that has a 30% BRIC weight this year.
Country weights are pivotal in terms of forecasting a emerging markets ETF’s performance. For example, the PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) was a star performer earlier this year due to favorable weightings to Thailand, Turkey and the Philippines and light BRIC exposure. That scenario flipped last month when some Asian markets plunged on fears the Federal Reserve would its stimulus programs. [PIE Hits a Rough Patch]
The country weight lesson is applicable to frontier markets ETFs as well. The iShares MSCI Frontier 100 Index Fund (FM) is up 10% year-to-date. That performance not only tops some marquee developing markets ETFs, but other frontier funds as well and the “secret” is FM’s country weights. [Frontier ETFs: Get in on the Ground Floor]
FM devotes nearly a third of its combined weight to Qatar and the United Arab Emirates, two of the world’s sturdiest equity markets this year. Stocks in those markets appreciated for various reasons, though chief among those reasons was the anticipation that both nations would be promoted to emerging markets status this. Index provider MSCI obliged last week, confirming that Qatar and UAE will join the MSCI Emerging Markets Index next year.
Not all frontier ETFs are created equal. For example, the PowerShares MENA Frontier Countries Portfolio (PMNA) has only offered half the gains of FM this year. Country weightings explain the performance difference. While PMNA devotes almost 53% of its weight to UAE and Qatar, the ETF also has a 15.6 weight to downtrodden Egyptian stocks. Not helping matters is the 2.2% weight to Morocco, which MSCI recently demoted to frontier from emerging status. Egypt could meet the same fate next year, said MSCI. [Egypt ETF Rocked by Protests]
Another frontier fund that has been hindered by its country weights is the Guggenheim Frontier Markets ETF (FRN) . FRN’s problem, the ETF is off 18.2% this year, has been heavy exposure to markets that are actually classified as emerging. Chile and Colombia ETFs have been punished due to sliding commodities prices and those countries represent nearly two-thirds of FRN’s weight, according to Guggenheim data.
FRN’s largest weight to a true frontier market is Argentina at almost 9.3% and to put things delicately, Argentina has not come close to mirroring the performances offered by Qatar and UAE. Lesson learned: Mind your country weights in emerging AND frontier markets funds.
iShares MSCI Frontier 100 ETF
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.