First Trust announced the launch of a new index fund tracking the economies of the BICK economies, a twist on the popular BRIC bloc of major emerging markets. This new fund also includes exposure to Brazil, India and China, but swaps Russia for South Korea. As such, BICK offers an emerging markets alternative that avoids the often volatile (and commodity-dependent) Russian economy for the more stable South Korean one. Furthermore, South Korea has emerged as one of the world’s leaders in the technology sector, and may be able to capitalize on its close location to rising neighbors in North Asia in a way that Russia never could.
The First Trust BICK Index Fund (BICK) is designed to track the most liquid and largest companies in the four BICK countries by following the ISE BICK Index. For inclusion in the ISE BICK Index, each component security must have a market capitalization of at least $100 million. For each country, the securities are ranked in descending order by market capitalization and in descending order by liquidity. The 25 top ranked securities for each country are then selected for inclusion in the index. If a country has less than 25 eligible securities, all eligible securities are selected. In order to determine the individual weightings, the index uses an equal weighted allocation methodology so that each country represents 25% of the index at each rebalance. All components within a country allocation are equally-weighted as well at the rebalance date which happens once a quarter.
According to the latest fact sheet, BICK had only 87 holdings, a result of a shortage of Indian companies that met index requirements. In order to keep India’s aggregate weighting at 25%, each Indian component is given a larger weighting in the index.
BICK will no doubt hope to attract assets from several well-established BRIC ETFs. In addition to the inclusion of South Korea over Russia, BICK’s unique equal-weighting methodology differentiates it from existing BRIC ETFs. The Claymore/BNY Mellon BRIC ETF (EEB), for example, allocates about 85% of its assets to China and Brazil and less than 4% to Russia. So while technically offering exposure to the BRIC, EEB is dominated by holdings in the BIC. EEB has become one of the most popular emerging markets ETFs, accumulating more than $1 billion in assets under management (see the Definitive Guide To BRIC Investing for a look at other BRIC ETF options).
The Russia Question
BICK should have immediate appeal to investors who are looking to make a play on emerging markets but are hesitant to add significant exposure to Russian equities. A declining population and still-rampant corruption present major barriers to long-term Russian growth. And while the country has made some progress in diversifying its economy, it remains heavily dependent upon strength in commodity markets, as evidenced by the collapse when oil and gas prices plummeted in 2008. But it’s worth noting that Russia has been one of the best performing global equity markets during the recovery. The Market Vectors Russia ETF (RSX) is up almost 250% since March 2009.
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Disclosure: No positions at time of writing.
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