Emerging Global Advisors, the ETF firm focused only on developing markets, on Tuesday will launch a core emerging markets equities fund that will span the capitalization spectrum and likely include small and midsize companies, addressing its concern about the shortcomings of some broad emerging market ETFs.
The EGShares Emerging Markets Core ETF (NYSEArca:EMCR), which will come with a net expense ratio after fee waivers of 0.70 percent, will be based on the S'P Emerging Markets Core Index, which starts by organizing holdings on an equal-weighted basis. Equal-weighted indexes tend to tilt portfolios toward smaller-cap firms, since larger firms have a smaller place compared with traditional cap-weighted indexes. However, the index then imposes a 15 percent country cap, which is a modification from strict equal-weighted methodology.
Also, of crucial importance in the prospectus is a disclosure that the S'P index includes securities in Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, Russia, South Africa, Thailand and Turkey.
Conspicuously missing from the list are Korea and Taiwan.
Those omissions set EMCR’s portfolio apart from existing broad emerging markets funds. Indeed, Emerging Global doesn’t think either South Korea or Taiwan are developing countries anymore, putting the ETF firm in the middle of a debate on emerging markets investing involving some of the biggest and most prestigious indexing firms.
Two funds that differ on this issue from EMCR are the current the Vanguard MSCI Emerging Markets ETF (VWO) and the Schwab Emerging Markets Equity ETF (SCHE). VWO is based on an MSCI index and holds both Korean and Taiwanese companies, while Schwab's SCHE is based on a FTSE index that eschews Korean companies but includes an allocation to Taiwan.
Emerging Global said in a white paper earlier this year that it had a problem with the large-cap tilt of funds that use the MSCI index , such as the $57 billion Vanguard MSCI Emerging Markets ETF (VWO), saying it exposes investors more to big multinational companies whose success is tied to the global economy rather than to local economies where the true growth stories can be found.
Interestingly, Vanguard recently said it is dropping VWO’s MSCI index in favor of the FTSE index on which Schwab’s SCHE is based, creating a major stir and taking sides with Emerging Global’s position on the issue of the place relatively wealthy countries such as Korea should have in developing markets investment vehicles.
Overall, the S'P Emerging Markets Core Index can include up to 116 leading companies that S'P Dow Jones Indexes determines to be representative of all industries in emerging market countries.
The New York-based ETF firm intends to replicate the index as closely as possible using American depositary receipts, global depositary receipts or ordinary local shares. However, when it’s not possible or easy to fully implement a replication strategy, EMCR may use a “representative sampling” strategy that would allow it to track the index holding fewer component securities. Such sampling could cause the fund to track the index less tightly.
Emerging Global also has two other core emerging markets funds that it put into the regulatory pipeline at the same time as EMCR. Those are:
- EGShares Emerging Markets Core Dividend ETF, which will have a net expense ratio of 0.70 percent
- EGShares Emerging Markets Core Balanced ETF, which will have a net expense ratio of 0.60 percent
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