Emerging markets, once the engine of global growth, have been
hit hard this year due to feeble demand, lower commodity prices,
and struggling currencies.
Further, the prospect of the Fed's QE3 tapering later this
year has compelled investors to pull out capital from higher risk
markets across the globe (read:
Emerging Market ETFs Tumble on Global Worries
). This is because investors are apprehensive of added troubles
in the emerging nations from further dollar appreciation and this
strong dollar impact on these risky markets.
That said, the two most popular emerging market
iShares MSCI Emerging Markets ETF (
Vanguard FTSE Emerging Markets ETF (
- together shed nearly $11.5 billion in the first half of 2013.
Investors are largely looking outside the emerging economies,
indicating deeper troubles for these countries.
IMF Cuts Growth Outlook
In such a backdrop, the IMF recently lowered its growth
forecast for the emerging nations to 5% for this year and 5.4%
for the next. According to the agency, the slowdown in emerging
nations would persist longer than expected due to prolonged
domestic capacity constraints, slowing credit growth and weak
The worst performers would include the BRICS (Brazil, Russia,
India, China and South Africa) nations. The
IMF slashed 2013 economic growth
outlook by 0.5% to 2.5% for Brazil, 0.9% to 2.5% for Russia, 0.2%
to 5.6% for India, 0.3% to 7.8% for China, and 0.8% to 2% for
For Mexico, the growth rate is expected to decline from 3.2%
to 2.9% for 2013 (read:
Time to Worry about the Mexico ETF?
). Other emerging economies in the sub-Saharan Africa region as
well as the Middle East and North Africa are also expected to
remain weak, with growth forecasted to fall 0.4% to 5.1% and 0.1%
to 3.9%, respectively.
Emerging Market ETFs To Avoid
In such a backdrop, we recommend investors to keep away from
many emerging ETFs at least for the short term.
Below, we take a closer look at three emerging ETFs that have
lost double digits in the first half of the year. This weakness
could continue into the second half of the year, given the
bearish fundamentals for these economies, suggesting the
following three ETFs might be ones to avoid (read:
Winning ETF Strategies For the Second Half
iShares MSCI BRIC ETF (
This fund tracks the MSCI BRIC Index, having accumulated
$465.5 million in AUM and trading in average daily volume of
roughly 190,000 shares. The product is well spread out across a
large basket of 315 stocks as each security makes up for less
than 4.35% share.
In terms of sector exposure, financials take one-third of the
assets while energy and consumer staples together make up for
another one-third portion. The Chinese firms dominate the
portfolio with 41.4% share, closely followed by double-digit
allocations of 25.5% in Brazil, 16.1% in India and 14% in Russia
Are BRIC ETFs in Trouble?
The ETF charges 66 bps in expense ratio and lost nearly 16.5%
in the year-to-date timeframe. BKF currently has a Zacks
ETF Rank of 4 or 'Sell' rating.
iShares MSCI South Africa ETF (
EZA is one of the main sources to play the South African
economy by tracking the MSCI South Africa Index and provides
exposure to 50 securities. The fund manages an asset base of
$458.9 million and trades at volume levels of roughly 370,000
shares a day.
The product is somewhat concentrated in its top 10 holdings as
it invests more than 58% of total assets in those. The fund is
skewed towards financial and consumer discretionary sectors with
27.38% and 20.42% share, respectively. The ETF charges 60
bps in fees and expenses from investors for this portfolio.
The ETF has delivered a negative return of 18.1% year-to-date,
as the fund continues to be affected by troubles surrounding the
country. The fund currently has a Zacks ETF Rank of 5 or 'Strong
Sell' rating (read:
Why You Should Avoid the South Africa ETF
SPDR S&P Emerging Middle East & Africa ETF
This is the only choice in the space that focuses on the
emerging Middle East & Africa region. The product follows the
S&P Mid-East and Africa BMI Index and holds 138 securities in
its basket. It is relatively unpopular with AUM of $66 million
and average daily volume of only 12,000 shares while charges 59
bps in fees a year from investors.
The fund is highly dependent on its top three holdings -
Naspers, MTN Group and Sasol Ltd -that make up for at least 26%
of the total assets. From a sectors look, financials take the top
spot with less than 30% share while consumer discretionary,
materials and telecom round off to the next three spots.
In terms of country exposure, the product allocates 92.8% to
South Africa while Egypt, Morocco and Australia make up for a
small portion in the basket (read:
Egypt ETF Surges Despite Political Turmoil
). GAF lost 14.8% in the year-to-date timeframe.
Investors should note that these products have clearly
underperformed the broader emerging market funds like VWO and EEM
by wide margins (see more in the
). The near-term pain could continue in these funds, especially
if investors start to believe in the Fed's stimulus tapering
Moreover, other drivers that might shift investors' focus from
these emerging nations include the monetary stimulus packages in
Europe and Japan that provide the much-needed relief to their
economies, as well as expectations of above-market performances
by some other country ETFs like in Southeast Asia, and certain
Eastern European economies.
Given this, investors may want to avoid these funds
for the time being, though risk tolerant long-term investors may
want to consider this recent slump a buying opportunity, provided
they have the patience for extreme volatility and are willing to
tolerate more losses in the near future.
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ISHARS-MSCI BRC (BKF): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-S AFRICA (EZA): ETF Research Reports
SPDR-SP E M E&A (GAF): ETF Research
VANGD-FTSE EM (VWO): ETF Research Reports
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