For many investors, the preferred way of accessing emerging
markets is to leave the burden of country selection at the door.
That means embracing a mult-nation ETF such as the Vanguard MSCI
Emerging Markets ETF (NYSE:
) or the iShares MSCI Emerging Markets Index Fund (NYSE:
Plenty of investors have made that choice. That much is
evidenced by the fact that VWO and EEM are not only the largest
and second-largest emerging markets ETFs, respectively. The duo
also represents the third- and fourth-largest ETFs by assets of
any kind. Combined, VWO and EEM have over $95 billion in assets
Despite the popularity of EEM, VWO and scores of other
multi-country emerging markets funds, the number of
country-specific options offering exposure to the developing
world continues to proliferate. That could leave some investors
wondering if a more granular approach can prove efficacious over
For now, EEM and VWO still track the same index, but that will
change in the coming months as VWO
parts ways with the MSCI Emerging Markets
So for the purposes of this exercise, EEM will be the
measuring stick of choice because it is a marquee emerging
markets ETF to which no wholesale changes are anticipated in the
near future. The exercise at hand is showing weather an ETF such
as EEM or basket of funds tracking the country's represented in
EEM perform better over time. Here are the different baskets.
This theoretical basket is comprised of the iShares FTSE China 25
Index Fund (NYSE:
), iShares MSCI South Korea Index Fund (NYSE:
), iShares MSCI Brazil Index Fund (NYSE:
) and the iShares MSCI Taiwan Index Fund (NYSE:
). Literally, those are the heavyweight countries in EEM,
representing about 56 percent of EEM's total weight.
South Korea and Taiwan are viewed as being two of the more
conservative emerging markets, so it is surprising to see that
over the past three years, EWY's volatility is 29.5 percent.
EEM's is 27 percent. Over that time EWY has returned 35.2
percent, an advantage of about 2,000 basis points over EEM. In
other words, an investor picked EWY over EEM made a good
The trick was ignoring the rest of this basket. Including
dividends, EWT is up 14.7 percent since late October 2009, but
EWZ and FXI are both in the red.
Low volatility emerging markets ETFs
have increased in popularity
, but neither EEM nor the funds that represent EEM's constituents
are explicitly "low vol" ETFs. However, some countries have lower
volatility than others.
This basket includes EEM's lower volatility nations as
represented by the following ETFs: The iShares MSCI Chile
Investable Market Index Fund (NYSE:
), iShares MSCI Mexico Investable Market Index Fund (NYSE:
), EWT and EWY.
Over the past three years, only EWY was more volatile, but
investors were compensated for that added volatility with the
aforementioned out-performance of South Korean stocks relative to
EEM. ECH offered more than double EEM's returns over the past
three years with almost 400 basis points less in volatility while
EWW outpaced EEM by almost four-to-one while being 220 basis
points less volatile.
Here, the four Latin American nations represented in EEM are
measured against the multi-country fund. ETFs used for this
exercise are ECH, EWW, EWZ, the iShares MSCI All Peru Capped
) and the Global X FTSE Colombia 20 ETF (NYSE:
). To be fair, GXG skews this basket because it is one of the
best-performing ETFs of any kind since the March 2009 market
Even when accounting for almost 11 percent three-year decline
in EWZ, the average return for these ETFs is 41.3 percent. With
the exception of EWZ, all of have been less volatile than EEM
since late October 2009. In 2012, EEM has outperformed ECH and
EWZ, but trailed EPU, EWW and GXG.
EEM's exposure to
, some of the fastest growing economies in Southeast Asia, is
minimal. Combined, Malaysia, Indonesia and Thailand represent
less than nine percent of the fund's weight.
With an allocation of less than one percent, the Philippines
was excluded from this exercise. Including the iShares MSCI
Thailand Investable Market Index Fund (NYSE:
) skews things a bit because this ETF has more than doubled since
October 2009. The Market Vectors Indonesia ETF (NYSE:
) is no joke, either, with a three-year surge of nearly 68
The iShares MSCI Malaysia Index Fund (NYSE:
) is the "laggard" with a gain of 56.3 percent. Only IDX has been
more volatile than EEM over the past three years.
To be sure, this exercise is not perfect if for no other reason
than it is backward looking. There are no guarantees the
countries that have outperformed EEM in the past will do so
again. Of course, expenses play a factor. For example, EWW, EWZ
and THD all have lower expense ratios than EEM's fees of 0.67
percent. However, fees of 0.52 percent, 0.59 percent and 0.59
percent spread over three investments is more costly than owning
just one fund that charges 0.67 percent.
Bottom line: Even with these issues, a more granular approach
to emerging markets can be useful to investors. If nothing else,
owners of broad-based funds such as EEM should consider one or
two country-specific funds to go along with EEM.
"Because each region or country has its own unique risk
profile, building an equity portfolio with regional- or
country-specific funds can offer the potential for higher
risk-adjusted returns," iShares Global Chief Investment
Strategist Russ Koesterich
. "Implementing through regional or country funds
allows an investor - even one without a strong view on country
performance - to assemble a portfolio that may be better
diversified than a traditional cap-weighted benchmark. Through
better diversification, we believe that it's possible for
investors to assemble portfolios with a higher return-to-risk
ratio." For more on emerging markets ETFs, click
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.