Investment in emerging markets have increased in recent years
as many have sought out these higher risk nations in a quest for
above average returns. Furthermore, these markets often offer up
more in terms of diversification, so many have looked abroad in
order to better spread out their portfolios as well (see
Do Country ETFs Really Provide
Diversification?
).
Yet these markets aren't always golden as they are generally
characterized by a developing economy, inferior sovereign credit
rating (especially compared to developed markets), and relatively
high levels of unemployment. However, over the past decade as
developed market woes have built up, things have changed
dramatically.
With globalization, many emerging markets have become vital
contributors to the overall global economic growth picture. In
fact, the rising population and increasing per capita income in
these economies make them accountable for a bulk of global
consumption at this point in time (read
Access the $30 trillion Consumer Market with
These ETFs
).
However, investing in emerging markets demands a steady
appetite for risk as most of these nations are commodity centric
economies which makes them high susceptible to any downtrend in
the global economy.
Currency risk is also a factor that is omnipresent as far as
emerging market investments are concerned. The high inflation and
interest rates in the emerging markets, especially compared to
the developed market counterparts, creates pressure on the
exchange rates causing the emerging market currency to
depreciate.
Thus, these investments can massively take a hit arising out
of currency fluctuations even if the underlying asset class
generates positive returns(see
Currency Hedged ETFs: Top International
Picks?
).
Still, their fairly liquid equity markets with low levels of
correlation with the developed country equity markets and
typically high yields (due to the high interest rate scenarios)
make them attractive destinations for aggressive, as well as
income seeking, investors.
With this backdrop, a look at the Zacks Top Ranked Emerging
Market ETF, the
BLDRS Emerging Markets 50 ADR ETF (
ADRE
)
, could well be of interest to investors seeking basket exposure
in this exciting slice of the market that can hopefully mitigate
some of the top risks highlighted above:
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in
the context of our outlook for the underlying industry, sector,
region, style box, or asset class. Our proprietary methodology
also takes into account the risk preferences of investors.
ETFs
are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while
they also receive one of three risk ratings, namely Low, Medium,
or High.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other products with a similar level of
risk.
For investors seeking to apply this methodology to their
portfolio in the emerging markets, we have taken a closer look at
the top ranked ADRE below:
BLDRS Emerging Markets 50 ADR ETF (
ADRE
)
ADRE seeks to match the performance and yield of the Bank of
New York Mellon Emerging Markets 50 Index before fees and
expenses. The index includes American Depository Receipts of 50
companies from the emerging market space.
Although all of its total assets are exposed to the
international equity markets, the ETF has successfully eliminated
exposure to currency risk by focusing on depository receipts
which are listed in the U.S markets and denominated in U.S.
dollars.
Therefore, one of the biggest worries of emerging market
investing is mitigated. This coupled with a low expense ratio of
30 basis points clearly gives ADRE an upper hand over other
options available to investors for an emerging market
exposure.
Naturally, the ETF has a strong correlation with the U.S.
equity markets as indicated by an R-Squared value of 79.58%
versus the S&P 500 index. Nevertheless, the ETF is known to
exhibit less vulnerability offering a low risk opportunity for
investors as it has an annualized standard deviation of just 24%
which can be considered low considering the volatile nature of
emerging market funds (see more in the
Zacks ETF Center
).
Also, the ETF has a decent asset base of about $317 million
and does a daily volume of around 41,500 shares. The ETF is
currently trading at attractive valuations of 1.59x its trailing
twelve month book value and 11.96x its trailing twelve months
earnings, so it could be a value choice as well.
From a sector viewpoint, ADRE relies heavily on a few sectors,
with Energy (22.26%), Telecommunication Services (19%) and
Financials (17.33%) being allotted the most exposure.
From an individual holdings point of view, the fund does well
in allocating just around 46% of its total assets in top 10
holdings and holds 50 securities in total. The ETF prioritizes
its bets across the bigger emerging market economies like Brazil
(31.40%), China (19.29%) and Mexico (9.22%).
The ETF has been somewhat weak for the trailing one year
period, primarily because of its heavy focus on Brazilian large
cap equities which have clearly underperformed within the time
frame in question (read
Time to Worry about Brazil ETFs?
).
However, the fund has a solid yield of 2.59% and could make
for an interesting choice due to its low risk nature. ADRE
currently has a Zacks Rank of 1 or 'Strong Buy' suggesting that
our system is looking for outperformance ahead for this
product.
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BLDRS-EMER MKTS (ADRE): ETF Research Reports
CHINA MOBLE-ADR (CHL): Free Stock Analysis
Report
TAIWAN SEMI-ADR (TSM): Free Stock Analysis
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