Although the entire ETF industry has enjoyed a tremendous boom over the last year, perhaps no corner of the market has expanded as quickly as emerging markets funds. According to State Street’s industry snapshot, assets in international ETFs totaled about $28.6 billion at then end of June, representing an increase of 27.5% year to date. While there are a number of diversified emerging market ETFs available from a number of issuers, the product offerings are now evolving to achieve exposure to specific sectors of emerging equity markets. Most recently, Emerging Global Advisors launched the Emerging Global Shares Dow Jones Emerging Markets Titans Composite Index Fund (EEG), its third ETF to offer targeted exposure to emerging markets. EEG will track an index comprised of the 100 largest stocks in major sectors across developing markets, with no individual sector comprising more than 10% of total holdings.
Earlier this year, Emerging Global Advisors completed its initial foray into the ETF market, introducing its Emerging Global Shares Dow Jones Emerging Markets Energy Fund (EEO) and the Emerging Global Shares Dow Jones Emerging Markets Metals & Mining Titans Index Fund (EMT). While there are a number of ETFs offering exposure to equity markets in emerging economies, EEO and EMT were among the first ETFs to focus specifically on a particular sector within these markets. iShares and PowerShares also have sector-specific emerging markets ETFs on the market. iShares launched the S&P Emerging Markets Infrastructure Index Fund (EMIF) last month, while PowerShares offers the Emerging Markets Infrastructure Portfolio (PXR). Although the two funds would appear to be direct competitors, they actually offer exposure to different countries and sub-sectors of the infrastructure industry. EMIF is dominated by Chinese equities, while PXR offers exposure to a more diversified basket of countries.
The Next Big Thing?
As new ETF providers continue to launch new product lines, certain trends are emerging (no pun intended). The market for “beta ETFs” (i.e., those that track well-known, broad-based equity and bond indexes such as the S&P 500) is already very crowded, and is dominated by the “big dogs” of the industry that can afford to offer expense ratios as low as 9 basis points. Newcomers to the industry (as well as smaller issuers attempting to grow their business) are, for the most part, staying away from the most popular corners of the market, instead trying to find new spaces that are yet to be tapped. The last year has seen a number of creative ETF innovations, including:
- Actively-managed ETFs from Grail (joining PowerShares in the space)
- Hedge fund ETFs from IndexIQ (with WisdomTree poised to follow)
- Religious values-based ETFs from JETS
- State-specific ETFs from TXF Funds (filing for approval)
- Residential housing up/down funds from MacroShares
While some of these funds will likely have limited appeal to investors, others may make quite an impression (personally, I think hedge fund ETFs are going to see some huge inflows over the coming years). With the launch of several sector-specific emerging markets funds, it appears that this area of the ETF market may be poised to expand significantly going forward. EGA certainly thinks so. According to its web site, the issuer plans to launch several sector-specific emerging markets ETFs, including basic materials, consumer goods, consumer services, financials, health care, industrials, technology, telecom, and utilities.
The possibilities aren’t quite endless, but pretty close. To date, most international equity ETFs offered on U.S. exchanges have focused on broad-based benchmarks that offer balanced exposure to a number of industries. And within the U.S., there are dozens of funds targeting various industries. But we’re yet to see funds offering targeted exposure within international markets. There’s no China financial ETF. Or a Russian telecom ETF. Or a South African health care fund. You get the point – the list could go on and on. As issuers continue looking for new ways to grab market share and put their own spin on the ETF concept, sector-specific international funds appear to be a logical expansion opportunity. We may be witnessing the opening of the floodgates now – don’t be surprised if we see a number of the existing players in the ETF industry push similar products to market in coming months.
Disclosure: No positions at time of writing.