Emerging Markets ETF Center
Welcome to the ETF Database Emerging Markets ETF Center, home to valuable resources for investors looking to gain exposure to emerging market stocks and bonds through ETFs. The ETF Database Emerging Markets ETF Center is sponsored by Emerging Global Advisors, a leading investment research firm and issuer of innovative exchange-traded products offering unique exposure to emerging markets.
As the developed world continues to report sluggish growth levels, emerging markets appear to be in the driver’s seat for the global economy for the time being. This is potentially great news for ETF investors as the number of funds tracking emerging markets has skyrocketed in recent years, allowing investors to accomplish virtually any investment objective. Funds now exist which allow investors to gain exposure to a variety of countries, sectors, and themes, ensuring that investors have the proper tools to build a diversified portfolio.While knowledge of emerging markets has surged in recent years, there are several key trends that may not be readily apparent to most investors but are key nonetheless. In the article, we have highlighted seven of these crucial factors which every investor needs to be aware of before choosing an ETF in this increasingly important sector.
Investing in China has become increasingly popular with American investors as many have begun to see the country as a rising economic superpower in the coming decades. Up until very recently, exposure to China via ETFs was concentrated into a few funds which offered exposure to mega-cap Chinese companies which were often already cross-listed on U.S. exchanges. However, the fund from Van Eck looks to change that by being the first American ETF to offer investors the chance to play the China A-Shares market. This market, which consists of Chinese companies that trade on the stock exchanges in either Shanghai or Shenzhen, is normally only open to domestic investors or qualified foreign investors and usually consists of smaller Chinese companies. Thanks to the use of swaps, American investors can now achieve access to an index tracking this market, potentially opening up a new world of investment.
In this special report, we highlight the important factors to consider when evaluating potential emerging markets ETF investments, and give our unbiased opinions on all the options out there. The complete report is available with a free 7-day trial to ETFdb Pro, which also includes full access to the following special reports:
As the “risk gap” between domestic and emerging equity markets has closed, billions of investor dollars have flowed into emerging markets ETFs. Most of these cash flows have been into the iShares MSCI Emerging Markets Index Fund (EEM), the largest emerging markets ETF by both assets and volume. But there are several other attractive emerging markets ETFs that may offer distinct advantages over EEM, including the Dow Jones Emerging Markets Composite Titans Index Fund (EEG).
While every investor can likely name the four countries that comprise the BRIC, far fewer can name the countries comprising the CIVETS bloc of emerging markets. According to The Economist, the six nations are Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, and while they are often overlooked they may provide investors with outsized gains in the near future. The six all have quickly growing populations, control over budgets and inflation and are all increasingly important players on the global economic stage. Thanks to the rapid proliferation of ETFs, the six nations comprising the bloc all have ETFs tracking their economies, allowing investors to invest in all six or any combination of these surging markets.
The ultimate goal of any emerging market is to eventually make the transition to ‘developed’ status but when that day finally comes it can often be a painful experience for emerging market funds. When Israel crossed over into the developed market level, its main ETF EIS, sold off by more than 4% as investors feared that the country’s stocks would be sold off by a variety of emerging market index funds and bought up in a far less quantity by counterparts in developed market funds. A similar situation could be brewing for the equities in South Korea and Taiwan which are both on the cusp of seeing their home nations make the transition to developed market status. When this happens, the move is likely to cause quite the earthquake for South Korean and Taiwanese equities which in some cases make upwards of 25% of emerging market index funds, potentially creating a period of high volatility as traders attempt to front-run rules-based index products ahead of their rebalancing dates.
Thanks to a recent report from BusinessWeek, investors now know which countries are the largest producers of some of the most important metals to modern life. While not always directly correlated, the prices of precious and industrial metals often have a material impact on the equity markets of resource-rich countries (just as high oil prices can translate into plush government coffers for OPEC countries). While it is up for debate how positive this trend is for some economies, it does allow investors to play commodities indirectly through emerging market ETFs which may be a better option for those that are worried about testing their luck in the futures markets.
As oil prices continue to climb higher, many investors in domestic energy ETFs have become frustrated with the surprisingly weak relationship between these funds and the cost of crude. Many now believe that the threat of a windfall profits tax from Congress is holding the stocks of U.S. energy companies in check in the current environment, rendering domestic energy ETFs as an ineffective play on rising oil prices. But beyond the U.S., there are other ways to gain exposure to the energy markets.
Many investors focus in on the major emerging markets of Brazil, Russia, India, and China but one Southeast Asian nation could potentially rival their economic growth levels over the next few decades. Indonesia, the world’s fourth most populous country, offers investors exposure to a dynamic economy which features high growth levels, low debt loads, and consumers who have shown the willingness and ability to spend. This trend looks likely to continue as rising costs in north Asia push manufacturing facilities down to Indonesia which has one of the lowest labor costs in the world despite having a relatively well-educated population.
While emerging markets have become increasingly important in recent years, the investor is lacking a consensus definition for the term. Several of the most popular emerging markets ETFs have significant allocations (nearly 25%) to Israel, South Korea, and Taiwan, three economies that have been classified as developed by the IMF for more than a decade and by many metrics more closely resemble the U.S. than the BRIC economies.
Many emerging market ETFs offer extreme levels of exposure to one of two sectors; financials or energy, often leaving allocations to the consumer sector at a minimum. This is especially unfortunately considering what a tremendous opportunity exists in the emerging market consumer sector. First, growing populations and surging incomes in many countries looks to further add to the number of consumers with discretionary income in the coming years. Secondly, the market remains largely undeveloped when compared to Western levels. The market capitalization levels of consumer stocks in the world’s three main developed market zones is over 40 times larger than the comparable sector market cap level in China and India despite larger total populations in these two Asian giants. While a few consumer-focused country specific emerging market ETFs have debuted in recent years, ECON represents the only fund on the market today which is focused on the emerging consumer across a variety of regions using local companies.
The U.S. ETF industry has expanded at a breakneck pace in recent years, resulting in hundreds of new fund launches and countless options allowing investors to efficiently access nearly every corner of the domestic market. But as some corners of the ETF market near saturation, others remain surprisingly undeveloped. For investors looking to target specific sectors of the global economy without making an allocation to the U.S., options are surprisingly limited. But that is beginning to change, and over the coming years it seems that this space is poised for explosive growth.
While Brazil and its main ETF EWZ, continue to dominate the headlines for investment in South America, there are several other options available to investors which can provide similar geographic exposure but in often faster growing or untapped markets. The Andean nations of Chile, Colombia, and Peru have all posted tremendous gains in recent months as investors slowly warm up to the idea of investing in these often-forgotten emerging markets which have managed to post solid gains thanks to in-demand commodities and robust consumer spending. Another option on the table is to look at sector or small cap funds which can offer a more pure play on local economies and give investors better growth opportunities as well.
Many investors assume that if they have exposure to the three most famous emerging markets– China, India, and Brazil– they are all set in terms of exposure to the developing world. Unfortunately, this means that many investors are significantly underweight in a variety of smaller markets which can also offer solid gains which tend to be far less correlated with developed markets than their counterparts in China or Brazil. The country ETFs on this list span every region of the globe with options available in South America, Africa, Europe ,and Asia, allowing investors to achieve their desired levels of exposure to nearly any market of their choosing.
Following a crisis that begin in the U.S. financial sector and spread to nearly every corner of the developed world, emerging markets financial firms have stepped to the global forefront. The world’s three largest banks (and four of the top 10) are now headquartered in emerging markets, and dwarf financial institutions in developed economies. Following a decade of rapid expansion, these banks are poised to post significant growth arising from sustainable demographic trends and continued development of infrastructure.
Although many investors allocate a significant amount of their emerging market holdings to the BRIC economies, this strategy overlooks four near developed markets which have the potential to provide investors with similar growth levels without the extreme volatility. The four nations of Taiwan, Israel, Chile, and Korea are all close to being regarded as developed markets despite the fact that fifty years ago these countries were third-world nations across the board. These incredible growth levels have led to incomes well above the world average and incredibly diversified economies which cannot be said of the BRIC nations which tend to be very poor in a per capita sense and often focus in on one or two major industries to generate growth. So while the BRIC may be bigger and more famous, the TICK bloc has shown that they have the ability to make the transaction from emerging to (nearly) developed, something that very few economies can say.
Emerging Markets ETF Resources
For investors looking to conduct more thorough research on emerging markets investment opportunities, ETF Database offers a number of valuable resources.
Additional resources from ETF Database:
- Emerging Markets Equities ETFdb Category Page
- Emerging Markets Equities ETFdb Category Report
- Emerging Markets Bonds ETFdb Category Page
- Emerging Markets Bonds ETFdb Category Report
ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here.