After watching rival Vanguard roll out more than a dozen domestic equity ETFs earlier this month, iShares continues to focus its attention on international stock markets, rolling out three new ETFs on Wednesday. The new funds include the MSCI Philippines Investable Market Index Fund (EPHE), MSCI Small Cap Brazil Index Fund (EWZS), and MSCI Small Cap China Index Fund (ECNS). The Philippines ETF will be the first of its kind to hit the U.S. market, while the other new products from iShares will go head-to-head with existing ETFs from Van Eck and Guggenheim.
Philippines: An ETF First
EPHE will seek to replicate the performance of the MSCI Philippines Investable Market Index, a benchmark that measures the performance of equity securities in the top 99% by market capitalization of stocks listed on stock exchanges in the Philippines. The index currently has about 27 securities, with a heavy tilt towards financials: that sector makes up about 45% of assets. Other large allocations are made to utilities (17%) and telecom (16%). Like many emerging market ETFs, EPHE will be light on exposure to the consumer sector, as discretionaries make up only about 5% of the related index.
The Philippines, a chain of islands in Southeast Asia, is home to a rapidly-evolving economy with a unique history. 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.
Goldman Sachs included the Philippines in its N-11, or “next eleven,” bloc of countries believed to have the potential to have a “BRIC-like impact in rivalling the G7.” With the 12th largest population in the world, the Philippines has tremendous economic potential, particularly as the development of major cities continues. But the country still has a long way to go. Remittances from overseas still account for a large portion of the economy, and many regions of the country have lagged behind larger metropolitan areas in terms of economic development. The Philippines is still very much an emerging market; the daily income for nearly half of the population is only a few U.S. dollars.
Brazilian Small Caps
EWZS will serve as a complement to EWZ, the popular Brazil ETF dominated by large cap stocks. The small cap ETF will track the MSCI Small Cap Brazil Index, a benchmark that consists of about 80 small cap Brazilian equities. Although EWZS will offer exposure to the same economy as the ultra-popular large cap Brazil ETF, the sector exposure is radically different. EWZS maintains a heavy tilt towards consumer discretionaries (26%), which account for only a small portion of EWZ. The large cap-focused iShares fund is dominated by exposure to banks and oil companies, a common bias among large cap international equity ETFs [see The Case For Small Caps In The Emerging Markets].
EWZS will compete most closely with the Market Vectors Brazil Small Cap ETF (BRF), one of the first funds to offer exposure to small cap stocks in emerging markets. In recent months iShares has introduced a number of funds that compete directly with established Van Eck products, including ETFs targeting Poland (EPOL) and Indonesia (EIDO); Van Eck’s Poland ETF (PLND) and Indonesia ETF (IDX) were the first to market in those areas [see the EWZS fact sheet].
China Small Caps
The third new fund will seek to replicate the MSCI China Small Cap Index, a benchmark that consists of about 300 small cap companies from the world’s second-largest economy. The benchmark measures the performance of stocks in the bottom 14% by market capitalization of the Chinese equity market, as represented by H-Share and B-Share markets. Recently, about 57% of the 302 constituent stocks were P-Chips, 17% were Red Chips, 15% were H-Shares, and 11% were B-Shares.
Similar to EWZS, the new small cap China ETF will make its largest sector allocation to the consumer discretionary sector (23% of assets). That makes the sector exposure very different from iShares popular large cap-focused China ETF; the FTSE/Xinhua China 25 Index Fund (FXI) makes only a very minor allocation to consumer services, and financials account for nearly half of total assets [see Beyond FXI: Alternative ETFs For China Exposure].
ECNS will also compete closely with an existing ETF, in this case the recently-renamed Guggenheim Small Cap China ETF (HAO). That fund offers exposure to about 150 small cap Chinese stocks, and also maintains balanced sector exposure that includes consumer, health care, and technology companies.
Each of the three new ETFs will charge an expense ratio of 0.65%. The average for the Emerging Markets Equities ETFdb Category is 0.69%, while the averages for the Latin America Equities and China Equities ETFdb Categories are 0.67%.
The launch of these three new products makes September one of the busiest months in recent memory from a product development standpoint; more than two dozen new ETFs from seven different issuers have hit the market this month. September also saw a material increase in ETF closures; Javelin, Geary, and GlobalShares all announced fund closures (eight in total), with the latter two issuers withdrawing completely from the U.S. ETF industry [for updates on all new ETFs, sign up for our free ETF newsletter].
Disclosure: Long BRF.