EGA Plans Targeted BRIC ETFs

by on November 11, 2009 | ETFs Mentioned:

Emerging Global Advisors, the New York-based ETF issuer that earlier this year pioneered sector-specific emerging markets funds, has filed a prospectus with the SEC for seven additional ETFs. The proposed funds include the first sector- and country-specific international funds, as well as the first ETFs to target mid-cap stocks in emerging market economies:

  • Emerging Global Shares INDXX India Infrastructure Index Fund
  • Emerging Global Shares INDXX China Infrastructure Index Fund
  • Emerging Global Shares INDXX Brazil Infrastructure Index Fund
  • Emerging Global Shares INDXX India Mid Cap Index Fund
  • Emerging Global Shares INDXX China Mid Cap Index Fund
  • Emerging Global Shares INDXX Brazil Mid Cap Index Fund
  • Emerging Global Shares INDXX Growing Asia Large Cap Index Fund

The India Infrastructure ETF will be based on an index composed of 50 Indian infrastructure equities, while the benchmarks underlying the China and Brazil ETFs will each consist of 30 infrastructure companies operating in that specific country. Each of the seven ETFs has an expense ratio of 0.85%.

New Territory

The proposed ETFs from EGA represent the first products to target specifically mid cap companies in emerging market economies. While the majority of U.S.-listed ETFs are dominated by mega cap companies, a handful of ETFs now offer exposure to small cap firms foreign countries. Van Eck’s Brazil Small-Cap ETF (BRF) has accumulated more $500 million in assets, while Claymore’s China Small Cap ETF (HAO) has attracted more than $200 million. Again, the index underlying the mid cap India ETF will consist of 50 individual stocks, while the China and Brazil funds would include 30 stocks.

Mid cap equity exposure is a key component of investor  portfolios in the U.S.: the four largest mid cap equity ETFs (MDY, IJH, IWR, and VO) have aggregate assets of more than $20 billion. But exposure to medium-sized business overseas is difficult for most U.S. investors to achieve. The market capitalizations of companies held by the most popular China, Brazil, and India ETFs often exceed $100 billion:

Ticker ETF Largest Holding Market Cap
FXI iShares FTSE/Xinhua 25 Index Fund China Mobile $192 billion
EWZ iShares MSCI Brazil Index Fund Petrobras $225 billion
INP iPath MSCI India Index ETN Reliance Industries $73 billion

Definitions for mid cap stocks vary, but generally companies with a market capitalization between $1 billion and $5 billion fall into this category. The size restrictions for companies in the indexes underlying the new EGA funds are as follows:

  • INDXX India Mid Cap Index: Less than the smallest constituent in the S&P CNX Nifty Index
  • INDXX China Mid Cap Index: Market capitalization between $500 million and $5 billion
  • INDXX Brazil Mid Cap Index: Market capitalization between $400 million and $4 billion

The INDXX Growing Asia Large Cap Index splits exposure between two groups of Asian economies: 1) India and China and 2) Malaysia, Thailand, and the Philippines. The benchmark includes the largest 25 companies by market cap from the combines list of companies domiciled in the fist group, as well as the 25 largest from the combined list of firms domiciled in the second list. Emerging markets ETFs are typically dominated holdings BRIC countries, with many investors overlooking the emerging Asian economies of Malaysia, Thailand, and the Philippines.

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Disclosure: No positions at time of writing.