EGA Launches Beyond-BRIC, Demand ETFs
August 15, 2012
Emerging Global Advisors, the fund provider known for its emerging markets strategies, today launched two ETFs that go off the beaten path and serve up focused access to some of the developing world’s less mature economies as well as the regions’ domestic demand story.
The EGShares Beyond BRICs ETF (NYSEArca: BBRC) tracks the Indxx Beyond BRICs Index and invests in equities from countries that are often overlooked by many emerging markets strategies already in the space such as Chile, Colombia, Czech Republic, Egypt, Hungary, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, South Africa, Thailand and Turkey.
The EGShares Emerging Markets Domestic Demand ETF (NYSEArca: EMDD) tracks the Indxx EM Domestic Demand Index and invests in the five economic sectors EGA sees as those that are directly linked to domestic demand: consumer discretionary, staples, telecommunications, utilities and health care. The ETF serves up exposure to 11 countries and currencies.
By and large, investors are much less discriminating in emerging markets equities than they are in U.S. equities exposure, EGA said in material it released on the funds.
Indeed, the majority of ETF assets tied to the space track the MSCI Emerging Markets Index and other BRIC-heavy broad benchmarks—only 3 percent of emerging markets ETFs today hone in on sectors, themes or different size and style methodologies.
What that means is that most of U.S. investors’ exposure to emerging markets is skewed toward the more mature economies in the space—as much as 70 percent of the MSCI benchmark is allocated to Brazil, Russia, India and China as well as to South Korea and Taiwan, two economies EGA’s president Bob Holderith recently suggested should not even be considered emerging anymore.
That dominance of more mature economies in the broad benchmarks may also increase their correlation to broad developed-world equities indexes such as the S&P 500, reducing the diversification impact that an emerging markets allocation can have on a portfolio.
“The MSCI Emerging Markets Index is a catalogue of what has happened in emerging markets, a natural consequence of being a broad market capitalization weighted index,” the company said.
Still, the two largest emerging markets ETFs today are linked to the MSCI benchmark, and they have resonated with investors thus far.
Vanguard’s MSCI Emerging Market ETF (NYSEArca: VWO), in fact, has been among the most popular ETFs in recent weeks, attracting inflows that have now pushed its total assets to $65.7 billion. Its iShares counterpart, the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM), boasts $34.5 billion in assets.
Capturing Domestic Demand
In a recent interview with IndexUniverse, Holderith pointed to booming domestic demand as a key driver in many emerging markets economies, and one that’s often overlooked in broad-based strategies.
MSCI’s index, for instance, allocates more heavily toward economic sectors such as financials and energy that fail to capture the domestic demand themes, he said.
Sectors like consumer staples and discretionary, utilities, telecommunications and health care—what EGA calls “domestic demand sectors” and the ones EMDD seeks to capture—represent less than a third of the total MSCI Emerging Markets Index pie.
Details Of The Funds
BBRC tracks a free-float market-capitalization-weighted index that currently allocates to 12 countries and currencies.
South Africa is the fund’s largest exposure, at 18.7 percent of the portfolio, while Mexico comes second, with an 18.5 percent allocation. From a sector perspective, financials snag roughly a third of the mix, and telecommunication names represent nearly 19 percent. The remainder of the portfolio is split among six other economic sectors.
EMDD comprises 50 holdings and includes 11 countries and currencies. Mexico is the fund’s largest country allocation, representing nearly 25 percent of the mix.
Consumer staples, discretionary and telecommunication services each represent anywhere from 26 to 29 percent of the portfolio, with health care and utilities splitting the rest. The mix is rebalanced annually.
Both funds cost 0.85 percent in expense ratio.
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