New ETFs: Beyond BRICs, Emerging Markets Domestic Demand

by on August 15, 2012 | ETFs Mentioned:

EGShares, the only ETF issuer to focus exclusively on developing economies, announced today the launch of two new funds that offer unique exposure to the economies of emerging markets. The new products include:

  • EGShares Emerging Markets Domestic Demand ETF (EMDD): This ETF will target the five sectors of the emerging market economy that tend to be impacted most heavily by domestic demand: consumer staples, consumer discretionary, telecom, utilities, and health care.
  • EGShares Beyond BRICs ETF (BBRC): As the name suggests, this ETF will target emerging markets beyond the BRIC bloc of Brazil, Russia, India, and China, and will also exclude the quasi developed markets of South Korea and Taiwan.

Case For BBRC and EMDD

Both new EGShares ETFs offer opportunities for investors to diversify beyond the traditional benchmarks used to achieve exposure to emerging markets. Specifically, the new ETFs represent ways to round out exposure to this asset class by going beyond the MSCI Emerging Markets Index that is a staple in many portfolios. While that benchmark is extremely broad-based with hundreds of individual holdings in dozens of different countries, an argument can be made that it is backward looking in nature — a record of what has already happened in the developing world [see also How To Buy The Right ETF Every Time].

Vanguard’s VWO and iShares’ EEM, two popular products linked to the MSCI Emerging Markets Index, have a couple of biases that the new EGShares ETFs will not. Specifically, the bulk of their exposure is to six markets: the quasi-developed economies of South Korea and Taiwan, along with the BRIC markets of Brazil, Russia, India, and China. BBRC goes beyond these traditional emerging markets to other developing economies that are exhibiting impressive rates of economic expansion but are not yet as large as the “big six.”

Moreover, popular emerging markets ETFs are often concentrated from a sector perspective in financials, energy, and materials stocks. Because these types of companies often maintain the largest market capitalizations, they come to make up substantial portions of market cap weighted indexes. However, while all sectors of the economy are impacted by increases in domestic demand, it is generally other types of companies that receive the largest benefit [see also BRIC-or-Bust ETFdb Portfolio].

The energy, financial, and materials sectors often play a key role in moving economies from frontier to emerging status–thanks in large part to financial infrastructure and exports. But it is other corners of the market that can thrive once middle classes begin to expand and spend freely–specifically, consumer goods and services, health care, telecom, and utilities. These sectors combine to make up a relatively small portion of most emerging markets ETFs, but will be front and center in EMDD [try our Free ETF Country Exposure Tool].

Under The Hood: BBRC

The Beyond BRICs universe includes 15 countries: Chile, Colombia, the Czech Republic, Egypt, Hungary, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, South Africa, Thailand, and Turkey. The underlying basket of 50 holdings covers all corners of the economy, although it does feature a concentration in the financials sector with telecommunication services receiving the next biggest allocation; oil & gas companies also account for a hefty chunk of total assets while there is minimal exposure to industrials and utilities [see BBRC Fact Sheet].

Under The Hood: EMDD

EMDD will feature exposure to 11 countries and currencies, including the four BRIC members but not South Korea or Taiwan. The largest individual country allocations will be made to Mexico, China, India, South Africa, and Brazil. With 50 holdings in total, EMDD is well-balanced from a sector breakdown perspective; telecommunication services, consumer staples, and consumer discretionary receive fairly equal allocations, with the next biggest chunk going to utilities followed by minimal exposure to the health care sector [see EMDD Fact Sheet].

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Disclosure: No positions at time of writing.