As ETFs have grown from a closet industry to a mainstream investing option, funds offering exposure to nearly every corner of the globe have popped up. But the exposure offered by international ETFs has historically been very broad in nature. Whereas U.S. investors have long had access to funds targeting various sectors (and even subsectors) of the U.S. economy, international funds have generally offered “all or nothing” exposure – the only options own the entire economy. For many investors seeking well-diversified exposure, this approach has been acceptable, and funds have flowed into international ETFs at an incredible pace.
But as the “home country” begins to fade, U.S. investors are looking to allocate larger portions of their portfolios to international equities, and seeking out ways to gain both more broad-based exposure and target specific parts of the economy. In response to this demand, some innovative ETF issuers have launched funds offering more targeted exposure to non-U.S. economies. Emerging markets have been one of the hot investment trends of the year, due in part to expectations for material growth in coming years, particularly relative to the developed world. ETFdb Pro members can read more about drivers behind emerging markets ETFs in our ETFdb Category Report (if you’re not a Pro member yet, you can sign up for a free trial or read more here).
Despite its major allocation to quasi-developed economies (see an explanation of that issue here), the MSCI Emerging Markets Index has become one of the most popular ways to gain exposure to emerging markets. While the broad-based exposure offered by funds tracking this benchmark may be desirable to some investors, others may wish to gain more targeted exposure to certain sectors within emerging markets economies. In addition to a composite ETF, Emerging Global Advisors offer three ETF that do just that – provide sector-specific exposure to the energy, financials, and metals and mining industries in emerging market economies.
ETF Options: Dow Jones Emerging Markets Energy Titans Index Fund (EEO)
Exposure To: Oil and gas producers and oil equipment and services providers in BRIC economies (about 80% of the ETF) as well as several other emerging markets.
Why This Sector Is Important: Many emerging market economies are expanding at impressive rates (China is expected to grow by more than 8% in 2010 while India will expand by more than 6%), and will have significant raw material needs going forward. Moreover, given the current political environment in the U.S., the potential for a windfall profits tax on domestic oil companies has perhaps weakened the relationship between oil prices and energy stocks. For investors anticipating a rise in crude prices, EEO may be one of the best ways to play this trend.
ETF Options: Dow Jones Emerging Markets Financials Titans Index Fund (EFN)
Exposure To: Banks, insurance companies (both life and non-life), real estate investments and services, and other financial services companies.
Why This Sector Is Important: Ten years ago, none of the world’s ten largest banks were headquartered in emerging markets. Today, as a result of both massive writeoffs at U.S.-based banks and a surge in the importance of emerging markets to the global economy, the world’s three largest financial institutions (and four of the top ten) are headquartered in China. Unlike their counterparts in developed nations, Chinese banks have no shortage of new customers, as continued urbanization continues to push city populations higher and grow the all-important middle class. In 1990, 26% of China lived in cities. By 2008, that number had increased to 46%, and is expected to grow to 70% over the next 20 years. In a nation of more than 1.3 billion people, that translates into a massive new potential customer base.
Metals & Mining Sector
ETF Options: Dow Jones Emerging Markets Metals & Mining Titans Index Fund (EMT)
Exposure To: Industrial and precious metals exploration, extraction, and production companies.
Why This Sector Is Important: Emerging markets have been established as the leaders of the global recovery, rebounding from the recent recession much more quickly and effectively than most developed economies (many of which are still contracting). As emerging economies continue to develop and expand, appetite for almost every type of raw material will be insatiable. As per capital income in these countries rises, so too will spending on automobiles, homes, and other consumer products that require significant raw material inputs.
Disclosure: No positions at time of writing.