Investors have two more options today when looking for
exchange-traded funds with emerging markets exposure. Emerging
Global Advisors has launched the EGShares Beyond BRICs (
) and the EGShares Emerging Domestic Demand (
) as part of their product line, including 19 other theme-specific
emerging markets funds.
[caption id="attachment_65160" align="alignright" width="300"
caption="The new funds focus more on countries like Egypt rather
than the BRICS"]
According to documents, the main impetus behind the funds is
problems in the construction and focus of MSCI-based emerging
market funds. The MSCI index, on which the popular iShares MSCI
Emerging Markets (
) is based, holds 44% of assets in BRIC countries and 26% of assets
in companies listed in South Korea or Taiwan. EGA argues that these
six countries have grown out of their 'emerging' status evidenced
by the IMF labeling South Korea and Taiwan as advanced and the BRIC
nations all within the top ten largest economies in the world.
In fact, as the Beyond BRIC fact sheet shows below, after
impressive growth in equity market capitalization earlier in the
decade, the BRICs have leveled off. Brazil will struggle with 2%
growth this year as investors continue to debate a
hard landing in China
. India is experiencing its slowest growth in years even as
inflation keeps the central bank from enacting more accommodative
Of course, the developed world is doing no better, with growth
of 2% barely possible in the United States and only a dream in
Going Where the Growth Is
Enter the 15 countries that make up the
Beyond BRICs fund
: Chile, Colombia, Czech Republic, Egypt, Hungary, Indonesia,
Malaysia, Morocco, Mexico, Peru, Philippines, Poland, South Africa,
Thailand and Turkey. In contrast to the slowing growth and
population dynamics in the BRIC nations, these countries have
continued to see their equity market capitalization increase as a
percentage of total world market capitalization. The IMF expects
the emerging markets world to expand by 5.6% this year and almost
6% in 2013 against growth of less than 2% in most developed
Population growth, a key component of growth accounting, is
projected to increase by 19% to 2030, compared to just 12.6% within
the BRIC countries.
The Beyond BRICs fund includes all ten sectors but will exclude
relatively-developed countries found in other emerging markets
funds like Brazil, Russia, India, China, South Korea and Taiwan.
The fund will track the Indxx Beyond BRICs Index, a free-float,
market-cap weighted index. The index has a trailing price-earnings
of 17.5 times and a 3.25% dividend yield. Companies in the index
are fairly large with a median market cap of $15.9 billion.
Emerging markets… but not really
Another criticism of MSCI-based funds has been the weighting to
sectors closely related to global growth like financials, energy,
materials and industrials. These sectors make up 57% of the
holdings in the benchmark EEM fund while consumer and domestic
growth plays like consumer goods, telecom, utilities and healthcare
account for less than a third of assets. The historic dependence of
emerging markets on the energy and materials sectors is the reason
behind the old axiom, "when United States sneezes the rest of the
world catches a cold."
Emerging Markets Domestic Demand
fund includes companies from BRIC nations, approximately 45.2% of
assets, but focuses exclusively on five sectors believed to benefit
from domestic growth. The consumer goods, telecom, utilities and
health care sectors are seen as the principal beneficiaries of
stronger organic demand within the emerging world.
Since the global recession, emerging market economic policies
have been enacted to support sustainable domestic growth and reduce
the historic dependence on exports and developed markets. Trade
within and between the emerging markets is projected to grow from
6% in 2000 to 38% by 2050.
The fund will track the Indxx Emerging Markets Domestic Demand
Index, a free-float, market-cap weighted index that has a trailing
price-earnings of 19.2 times and a 2.62% dividend yield. Companies
in the index are marginally smaller than in the Beyond BRICs fund,
but still relatively large with a median market cap of $11.6