Emerging Market ETF Investing Beyond The BRIC
As the term ‘BRIC’ has entered the average American’s lexicon over the past two decades, many investors have seen the promise and peril of exposure to these rising superpowers. As more have invested and globalization has occurred, the correlation between these markets and industrialized nations has risen substantially; the once untapped markets see billions of dollars flow into and out of their markets based on the risk appetites of developed market investors. While this phenomenon has given many portfolios much needed international exposure, some investors are wary of focusing emerging markets exposure on a handful of international economies that have benefited tremendously from a surge in foreign capital.
While almost everyone has heard of the BRIC, other acronyms have entered the world of finance in the past few months. Recently, the Economist came up with a new term to describe six markets that are flying under investors’ radars but may present compelling investment opportunities. This bloc is known as ‘CIVETS’ and includes Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. Together these nations represent a chance for investors to buy into often overlooked emerging markets that all have young and growing populations, diversified economies, and–for the most part–have inflation under control thanks to low debt levels and balanced trade accounts [read Beyond The BRIC: Ten Country-Specific Emerging Markets ETFs].
Not surprisingly, all six are easy to invest in using ETFs; all have funds tracking their individual economies and many find their way into a variety of emerging market or regional funds as well. Below, we profile the ways to access these markets in order to give investors seeking more diversified emerging market exposure a closer look at these up-and-coming economies [also see The Definitive Guide To BRIC ETF Investing].
Colombia’s economy has been surging ahead in recent years thanks to sound pro-business policies that have helped the country to shed its image as a narco-state. Former President Alvaro Uribe has been described as a man who “changed the rules and began to encourage companies to come in and help develop their oil resources,” wrote Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors. “He has taken those petrodollars created and reinvested them back in the country’s infrastructure and created jobs.” Holmes also noted how this was in sharp contrast to policies in neighboring Venezuela or even oil rich Mexico. The country now ranks high on a global competitiveness survey for business sophistication, market size, and strength of investor protection, helping to make it extremely easy for foreigners to invest in and develop the country.
Investors are beginning to take notice of the Colombian economy; the only ETF offering pure play exposure to the country, the Global X/InterBolsa FTSE Colombia 20 ETF (GXG), now has close to $80 million in assets under management thanks to its incredible 2010 performance. GXG has surged ahead by more than 50% so far this year and has gained almost 25% over the past three months. It’s also worth noting that GXG exhibits a very low beta, giving it value as one of the few equity funds that doesn’t maintain a strong correlation with U.S. markets [see The Colombia ETF's Secret Sauce].
For investors seeking an emerging market with a dynamic and balanced economy, Indonesia makes for a sound choice. The country has seen near double digit growth for the last few years, spurring a doubling in average income since 2005. Although the country has seen its average incomes surge higher, it maintains one of the lowest labor costs in the region, ensuring that the nation will continue to be a destination for low-cost factories who will seek to take advantage of Indonesia’s youthful and relatively well-educated population.
For investors bullish on Indonesia, there are two excellent options: the iShares MSCI Indonesia Investable Market Index Fund (EIDO) and the Market Vectors Indonesia Index ETF (IDX). While the funds offer investors similar exposure, they are by no means the same; IDX has a much more narrow focus, while EIDO casts a wider net but charges a slightly higher expense ratio. However, investors can’t go wrong with either fund; over the past three months both are up more than 13% [also see Why Indonesia Belongs In The BRIC].
As labor costs continue to rise in China, many factories have moved their operations down to Vietnam in order to help contain manufacturing costs. Surprisingly, Vietnam ranked higher than the U.S. in terms of wage determination flexibility and the relation of worker productivity to pay in a recent competitiveness study, giving companies even more reasons to come to the country to set up manufacturing bases. This has been great news for the Vietnamese population, which has seen growth rates approaching 8.5% over the past decade and lower than average unemployment levels. The country is now a member of the WTO, and as Vietnam further develops its economy growth looks likely to continue well into the future [see Will The Vietnam ETF Get A Boost From Chinese Labor Troubles?].
The main way to play the Vietnamese economy through ETFs is with the Market Vectors Vietnam ETF (VNM). The fund is heavily concentrated into a few sectors with financial (29%), energy (17%), and industrial materials (16%) making up the lion’s share of VNM’s total assets. The fund also focuses in on mid cap securities, which make up almost half of the fund–a rarity for country-specific ETFs which seem to be prone to heavy weightings in mega cap firms. The fund, which charges an expense ratio of 0.76%, has surged higher by nearly 6% over the past two weeks.
Although Egypt has a higher than average inflation rate and a similarly high budget deficit, the country finds itself at the crossroads between Europe and much of the Middle East, ensuring that its ports will remain the hub of trade for decades to come. Not surprisingly, the country is also a top destination for tourists in the region and the Egyptian government is looking to expand this corner of the economy further; the robust tourism industry is expected to bring in over $12 billion dollars this year.
In terms of industries, the country remains heavily dependent on oil. But output has dwindled in recent years and the country has begun to exploit its vast natural gas fields, which look likely to pick up much of oil’s decline in the coming years. While the country has seen its oil output drop off, its political importance has surged since Egypt is by far the largest member of the Arab League in terms of population and one of the two biggest economies in the bloc. Due to this, the country looks to exercise its sizable influence over the region for years to come–it also doesn’t hurt that the headquarters for the organization is located in Egypt’s capital.
Currently there are very few options targeting the Middle East, but investors seeking exposure to Egypt have the Market Vectors Egypt Index ETF (EGPT) available to them. The fund tracks the Market Vectors Egypt Index which provides exposure to publicly traded companies that are domiciled and primarily listed on an exchange in Egypt or that generate at least 50% of their revenues in Egypt. EGPT currently invests in 28 securities with three sectors making up the vast majority of the fund’s total assets; financials (43%), industrial materials (29%), and telecommunications (17%). The fund charges an expense ratio of 94 basis points [read Egypt ETF: A Wonder Of The ETF World].
Turkey appears to be on the cusp of joining the EU and gaining free access to the continent’s 300 million-plus market thanks to the passage of a recent constitutional amendment that helps the country comply with European Union political standards. The nation has also been rapidly developing its infrastructure so that Turkish goods can be easily carried to the large markets of the West. Even if the deal with the EU doesn’t materialize, the country looks to be relatively unfazed due to the massive size of its domestic market, which is currently the 15th largest in the world. Turkey has also started to become a bigger influence in Near East political events, which could help the country to further dominate the region and extend its influence along its southern border. Furthermore the country has the highest GDP per capita (using PPP) out of the six countries in the bloc, suggesting that it may be closer than most in its path towards developed market status [see Turkey's Economy Feeds TUR].
Investors seeking access to the Turkish equity market should consider the iShares MSCI Turkey Investable Market Index Fund (TUR), which tracks the MSCI Turkey Investable Market Index. The fund holds 94 securities in total with a heavy weighting to the financial sector, which comprises nearly half of the fund’s total assets. Additionally, the fund also offers investors access to industrial materials (16%) and telecom sectors (10%) but is light on health care and technology exposure. TUR has been a solid performer so far in 2010, gaining more than 20% since the start of the year.
Vast mineral wealth is the key in South Africa, a country which contains nearly 80% of the world’s platinum and is the world’s second largest miner of gold as well. However, the South African economy today is extremely focused on services, suggesting that the country has been able to turn some of its mining cash into profitable investments in other sectors of the economy. The country’s location hasn’t hurt either; as the most developed country in the region, South Africa maintains its position as a trading and transit hub for virtually all investors seeking to move north into Africa or pass by the region into Brazil or India. With a successful hosting of the World Cup earlier this year, many have quickly gained confidence in the promise of this country to continue its development well into this decade.
For investors bullish on the largest economy in Africa, the iShares MSCI South Africa Index Fund (EZA) offers an intriguing choice. The fund holds almost 50 securities in total and is overweight in the industrial materials sector, which comprises 34% of EZA’s total assets. Its top individual holdings include mobile phone operator Mtn Group (11%), oil giant Sasol (9.4%), and Standard Bank Group (7.5%). The fund charges an expense ratio of 63 basis points and has gained about 15% so far in 2010 [see Time For An Africa ETF?].
Disclosure: Eric is long EZA.