Van Eck Plans Small Cap Emerging Markets, CEF ETFs

by on March 23, 2011 | ETFs Mentioned:

Van Eck, the New York City-based issuer known in the ETF world for funds offering exposure to hard assets and emerging markets, continues to get creative in its product development efforts. In recent SEC filings the company detailed plans for a small cap emerging markets ETF and an ETF that invests in closed-end funds, putting twists on existing products offered by State Street and PowerShares.

The Market Vectors GDP – Emerging Markets Small-Cap Equity ETF would seek to replicate an index consisting of small cap emerging market stocks. The proposed Van Eck fund would be similar to the SPDR S&P Emerging Markets Small Cap ETF (EWX), though some nuances of the underlying indexes would result in different risk/return profiles. The Market Vectors fund would be linked to an index that weights individual countries based on GDP relative to other economies in the portfolio. So China would presumably receive the largest weighting, followed by Brazil, Russia, India, and Mexico. EWX, like many emerging markets ETFs, makes its largest allocation to Taiwan, a relatively small economy that falls behind Turkey, Indonesia, and Poland in terms of GDP. According to 2010 data from the IMF, Taiwan’s economy is roughly 7% the size of China [see Does South Korea Belong In Your Emerging Market ETF?].

The idea of weighting individual countries by GDP has some intuitive appeal, as it results in exposure that more closely corresponds to the aggregate economy of the developing world. Most ETFs offering exposure to emerging markets are weighted in market capitalization, a feature that can result in heavier tilts towards quasi-developed nations such as Taiwan and South Korea. Relative to its contribution to global GDP, China is severely underweighted in many global equity ETFs [see How Global Is Your Global ETF?].

CEF + ETF = ???

Van Eck also shed some light on plans to develop an ETF that invests in closed-end funds. The Market Vectors Closed-End Fund ETF would seek to replicate an index that includes U.S. CEFs that invest in taxable fixed income securities. PowerShares already offers a CEF Income Composite Portfolio (PCEF) that has become popular with investors looking to enhance current returns. PCEF, which has accumulated close to $200 million since launching a little over a year ago, invests in closed-end funds focusing on investment grade fixed income securities, high yield fixed income securities, and funds that utilize an option writing strategy. That fund focuses on CEFs trading at a material discount to NAV, one factor contributing to a relatively juicy SEC 30 day yield of about 8% [see Beyond JNK: ETF Options For Attractive Yields].

Unlike ETFs, closed-end funds are vehicles that have a limited number of shares and are not generally redeemable until fund liquidation. Whereas the creation/redemption mechanism build into ETFs generally keeps the price of the fund closely aligned with the net asset value of the underlying securities, CEFs often trade at a premium or discount to NAV depending on the level of demand that exists in the market. That introduces additional risk factors, as changes in the premium or discount can have a material impact on fund returns.

[For updates on all new ETF launches, sign up for our free ETF newsletter]

Disclosure: No positions at time of writing, photo is courtesy of Jakub Halun.