have been lagging their developed counterparts this year and have
been among the worst performing products in the first quarter.
This is largely due to a slowdown in domestic demand in the key
emerging markets, a lingering Eurozone crisis (which can impact
exports), and appreciation in the U.S. dollar.
In fact, these ETFs clearly underperformed the broader U.S.
market funds like SPDR S&P 500 ETF (
) and Dow Jones Industrial Average ETF (
), and the world market funds like iShares MSCI World Index Fund
) by a wide margin in the quarter. Flows into ETFs offering
emerging market exposure have slowed this year.
Notably, this is the first time in more than a decade
when emerging countries have underperformed during a global rally
A Trio of Top Emerging Market ETFs for 2013
This is because most of the emerging economies like India,
Brazil and China have been struggling to reinvigorate growth.
Investors should note that worries on the macroeconomic and
political front in India, the property market in China, and
persistent inflation and interest rates hike issues in Brazil are
keeping the emerging market returns in check.
Additionally, most of these nations are commodity-centric
economies that make them highly susceptible to any downtrend in
the global economy. Further, currency declines against the
greenback have hit hard both equity and debt markets in the
emerging economies, adding to woes.
Despite these weaknesses, emerging markets are expected to
grow substantially compared to the developed world. According to
the International Monetary Fund (IMF), emerging economies would
grow 5.9% in 2013 compared to 1.9% for developed countries and 2%
for the U.S.
Also, valuations for emerging market stocks appear cheaper
than the U.S. and developed market stocks, suggesting nice entry
points. As a result, investors could tap this opportunity in the
form of a basket approach with ETFs (read:
Emerging Market ETFs to Soar in 2013?
While there are several ETFs in the emerging market space, we
have highlighted three of the most popular funds in the segment,
each of which have posted a loss in Q1. However, these funds
could fetch healthy returns considering the attractive valuation
of their stocks and solid growth projections by the IMF, making
any of the following interesting picks for globally-focused
iShares MSCI Emerging Markets ETF (
One of the most popular ways to follow emerging markets is
through EEM, a fund that tracks the MSCI Emerging Market
Index, which measures the equity market performance of various
The fund is widely spread across a large basket of 837
securities and puts little in individual stocks, preventing it
from heavy concentration. It puts just 15.85% in the top 10
holdings, suggesting minimal company specific risk. Samsung
Electronics, Taiwan semiconductor and China Mobile occupy the top
three positions in the basket.
From a sector perspective, financials take the top spot with
more than one-fourth of the assets, while information technology,
energy and materials round out the next three spots in the basket
Banking ETFs: Laggards or Leaders?
The product appears rich with AUM of over $45.5 billion and
average daily volume of about 50 million shares. It charges quite
a high annual fee of 66 basis points from investors for the
diversity in its portfolio.
In terms of individual countries, China enjoys the maximum
allocation with a share of 17.46% while South Korea, Brazil and
Taiwan also get double-digit allocation with a share of 14.72%,
12.64% and 10.74%, respectively.
Currently, EEM is trading at P/E of 18.36 times and has a
Zacks ETF Rank #3 or 'Hold' rating.
Vanguard FTSE Emerging Markets ETF (
VWO is another popular ETF to track the emerging market with
the same index. The fund manages an asset base of $58.4 billion
and trades at a volume of more than 18 million shares a day.
The product holds a great deal of securities, about 1,060, and
has a slight tilt towards one firm - Samsung Electronics - with
4.1% share. It offers a wide diversification across individual
holdings as no other firm makes up more than 2% of VWO. The top
10 holdings combine to make up for 17.8% of the assets.
For sectors, financial gets the maximum allocation closely
followed by energy, technology and basic materials sectors. Among
various nations, China, Brazil, Taiwan and Korea enjoy
double-digit allocation in the fund with respective shares of
18.6%, 13.9%, 10.8% and 10.3% (read:
Are China ETFs in Trouble?
). The fund charges a fee of 18 basis points annually.
Currently, the ETF is trading with a P/E of 13.6 times and has
a Zacks Rank #2 or 'Buy' rating. This suggests that this product
is expected to outperform over the long haul compared to the
other funds in the sector.
WisdomTree Emerging Markets Equity Income Fund
This fund tracks the WisdomTree Emerging Markets Equity Income
Index, which measures the performance of the highest dividend
yielding stocks selected from the WisdomTree Emerging Markets
Dividend Index (read:
4 Excellent Dividend ETFs for Income and
With a total of 237 stocks in its basket, the product is
widely spread across individual securities with just 32.62% of
its assets in top 10 holdings. The top three firms - China
Construction Bank, Gazprom and Banco do Brasil - comprise about
17.43% of the combined share in the basket.
The fund is heavy on financials, closely followed by energy,
materials and telecommunication services. In terms of country
allocations, Taiwan is at the top (19.62%), followed by China
(16.26%), Russia (12.59%) and Brazil (12.16%).
The product has amassed over $5.5 billion in AUM and trades in
good volume of more than 737,000 shares per day. The ETF charges
63 bps in fees per year from investors.
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WISDMTR-EM EQ I (DEM): ETF Research Reports
SPDR-DJ IND AVG (DIA): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-MS WORLD (URTH): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
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