Interest in emerging markets has grown tremendously over the past few years, as the developing world has accounted for almost all of global GDP growth while the U.S., Western Europe, and other developed countries struggle to get back on track. Many investors have embraced ETFs as a means of overweighting the emerging markets, favoring the cost efficiency, immediate diversification, and enhanced liquidity that the exchange-traded wrapper offers. While many investors expect that these funds will offer exposure to a diversified basket of rapidly-expanding economies, most emerging markets ETFs are heavily tilted towards the “big four” economies of Brazil, Russia, India, and China–better known as the BRIC bloc. But as some major financial institutions have pointed out, there is a lot more to emerging markets than these four economies [see also Emerging & Frontier Markets ETFdb Portfolio].
Goldman Sachs, the institution that first coined the term “BRIC” in a 2001 paper, published an economic report in 2005 highlighting another subset of emerging markets: the Next Eleven, or “N-11” countries. According to Goldman, the N-11–which includes Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, and Vietnam—consists of large population countries “that could potentially have a BRIC-like impact in rivaling the G-7.”
As billions of investors have flowed into red-hot emerging market economies, some investors have begun to look beyond the BRIC for investment opportunities. The N-11 consists of a group of intriguing economies that could play an increasingly important role on the global economic stage going forward. When constructing the N-11 bloc, Goldman sought to “identify other countries that might have the kind of potential for global impact that the BRICs projections highlighted”[see also How Investors CAN Play The BRIC Through A Different Set Of Country ETFs].
The members of the N-11 bloc are perhaps more different than they are alike; the countries vary significantly in terms of level of development and overall economic potential. South Korea is a developed market by many standards—including those used by the IMF—while Iran and Pakistan are among those that face “broad and systemic issues across a wide range of areas.” Openness to foreign investment ranges from non-existent (Iran) to significant (Nigeria and Vietnam).
One common thread is the large populations; many N-11 members are among the most populous countries in the world, including Indonesia (fourth), Nigeria (seventh), and Bangladesh (eighth). And Goldman believes that all have the capacity to grow by at least 4% annually over the next 20 years, potentially setting the stage for N-11 GDP to reach two thirds of G-7 GDP by 2050 [see also Among Developed Market ETFs, Singapore And Hong Kong Crush The Competition].
Many of the N-11 economies have been among the best performing equity markets in recent years, thriving off of shifting demographics, enhanced access to international capital, and in many cases an abundance of natural resources. Of course significant obstacles remain; poor fiscal management, low levels of education, and lingering restrictions to foreign investment. But the investment case for the N-11 is compelling, especially for investors looking to expand emerging markets exposure beyond the BRIC [see also QE2 Slaughters Long-Term Treasury ETFs].
Below we profile various ETFs that offer investors opportunities to diversify emerging markets portfolio through exposure to the N11:
Market Vectors Egypt Index (EGPT)
Issued by Van Eck, EGPT tracks the performance of the Market Vectors Egypt Index, which provides exposure to publicly traded companies that are located and primarily listed on an exchange in Egypt or that generate at least 50% of their revenues in Egypt. EGPT is significantly overweight in financial and industrial material holdings, with these sectors combining to make up more than 60% of the portfolio. Unlike most emerging market ETFs, EGPT is not dominated by mega-cap equities; mid-cap and small-cap companies make up a big portion of holdings, further providing potential for growth.
Market Vectors Indonesia Index (IDX)
IDX seeks to replicate the performance of the Market Vectors Indonesia Index, which provides exposure to publicly traded companies that are domiciled and primarily listed in Indonesia, or that generate at least 50% of their revenues in Indonesia. IDX has been one of the top-performing equity ETFs in 2010, gaining more than 40% since the beginning of the year. iShares also offers an alternative to Van Eck’s product; EIDO is designed to track the MSCI Indonesia Investable Market Index.
iShares MSCI South Korea Index (EWY)
EWY tracks the MSCI Korea Index, a benchmark that spreads exposure across a number of different sector of the South Korean economy; the largest allocations are to information technology (29%), financials (16%), industrials (15%), materials (13%), and consumer discretionary (12%). EWY has enjoying a nice run-up since the beginning of 2009, and so far this year it has returned more than 16%.
Another option for South Korean exposure is the IQ Small Cap South Korea ETF (SKOR). Whereas EWY is comprised almost exclusively of large cap and mega cap stocks, SKOR invests in small cap South Korean equities—a feature that may offer more “pure play” exposure to the local economy [see all ETFs with South Korea exposure]. Moreover, many Asia Pacific Equity ETFs include exposure to South Korea, but spread their assets across other economies as well.
iShares MSCI Mexico Index (EWW)
EWW tracks the MSCI Mexico Investable Market Index, a benchmark that measures the performance of the Mexican equity market. One third of the funds assets are allocated in the telecommunications sectors, with the top individual holding being America Movil at 25%. Materials, consumer goods, and consumer services receive the next biggest sector weightings, with Wal-Mart De Mexico being the second largest individual holding at 10%. Considering the funds diversified exposure and its solid year-to-date return, it’s no surprise that EWW is a popular instrument for capturing the potential that the growing Mexican economy offers [see A Closer Look At The Mexico ETF].
Market Vectors Africa Index (AFK)
While there are no pure play ETFs offering exposure to Nigerian equities, the Market Vectors Africa ETF maintains a moderate allocation to the economy. AFK tracks the Dow Jones Africa Titans 50 Index, a benchmark that provides exposure to publicly traded companies that are headquartered in Africa or that generate the majority of their revenues in Africa. In terms of allocation by country, the fund offers 18% exposure to Nigeria, 26% to South Africa, 20% to Egypt, and 12% to Morocco [see A Closer Look At Frontier Market ETFs].
Market Vectors Vietnam Index (VNM)
VNM, issued by Van Eck, is the only U.S.-listed ETF that focuses exclusively on the frontier market of Vietnam. The fund has 28% of its assets invested in financial companies, 20% in energy, and 12% in industrial materials. Over the last several decades, Vietnam has transitioned from a planned economy to a Socialist-oriented market economy, opening its doors to foreign investors and taking steps to become integrated into the global economy. Many institutional investors have noticed the tremendous economic potential of Vietnam, which could become one of the world’s 20 largest economies within the next two decades.
iShares MSCI Philippines Index (EPHE)
Launched in October 2010, EPHE is one the three newest additions to the iShares ETF platform [see iShares Rolls Out Three New International ETFs]. This new fund is designed to track the MSCI Philippines Investable Market Index, an index which measures the performance of equities listed in the Philippines. The portfolio is comprised of 26 holdings total, with 46% allocation to the financial sector, 17% in utilities, 16% in telecom, and 15% in industrials. EPHE offers an opportunity for investors to tap into the economic potential the Philippines harbors. Once the second-wealthiest country in Asia, the Philippines suffered a prolonged stretch of economic mismanagement under the dictatorship of Ferdinand Marcos. Now a constitutional republic, the Philippines has seen its economy flourish in recent years as trading relationships with China, Singapore, Malaysia, Thailand, and other rapidly-expanding Asian economies have expanded considerably.
iShares MSCI Turkey Index (TUR)
Investors can use TUR, which tracks the MSCI Turkey Investable Market Index, to gain exposure to Turkey’s flourishing equity market. The funds top three holdings are banks, and roughly 50% of its portfolio is allocated to the financial sector. It’s prudent for investors to keep in mind that being overexposed to any single sector, especially in an emerging economy, is an aggressive strategy that offers both considerable upside potential and significant risk [see Warning: Five Country ETFs Heavily Focused On Financials]. Considering the relative risks and rewards discussed above, TUR has proven to offers a generous reward for those willing to stomach the volatility, returning an impressive 39% year to date.
Currently there are no ETFs providing exposure to Bangladesh, Iran, or Pakistan. That could change in the not-so-distant future, however, as Global X has filed for approval of an N-11 ETF. The proposed fund would exclude Iran—U.S. investors are restricted from accessing the country’s stock markets—but include the other N-11 economies not currently accessible through the ETF market [see page 16 of SEC Filing].
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Disclosure: Photo courtesy of Yohanes Budiyanto. No positions at time of writing.