Still, this year's run-up in emerging markets has Gordon concerned about a downturn in the notoriously volatile group, and he recently sold a position in the iShares Brazil Fund (EWZ) for that reason. If there is a pullback, he plans to pick up a small company ETF that focuses on domestic consumption in emerging markets such as Brazil or China.
Narrowing The Focus
A couple of years ago, such narrowly focused emerging market ETFs were rare. Now, single-country, market-cap specific and sector plays make up the bulk of new emerging market offerings. The most popular single-country ETFs cover each of the BRICs, but some venture into more far-flung regions of the globe such as Africa or Turkey. And a growing roster of "frontier" ETFs explores areas such as Egypt, Vietnam, Kazakhstan and Chile.
Liquidity varies among the group. The most popular single-country ETF, iShares Brazil, has over $10 billion in assets and trades over 16 million shares a day. The Van Eck Market Vectors Russia ETF (RSX) has average daily trading volume of over two million shares and assets of $961 million, while the firm's Brazil small-cap offering (BRF) has average daily trading volume of about 400,000 shares and assets of $289 million. But with so many emerging-market newcomers, low trading volume can be a concern and some, such as iShares MSCI Israel (EIS) or Emerging Global Advisors Metals & Mining (EMT), trade less than 100,000 shares on a given day.
Because a country's economy often hinges on one or two sectors, emerging market returns can vary enormously. For most of this year, concerns about the credit crunch's impact on growth in consumer spending suppressed returns in Eastern Europe. On the other hand, rising commodity and materials prices and infrastructure expansion have turbo charged the Brazilian and Russian markets.
Carl Delfeld, publisher of Chartwelletfadvisor.com, uses single-country ETFs to complement broader emerging market ETF holdings. "The problem with diversified emerging market ETFs is that they tend to have most of their assets in a few countries, so this is one way to broaden exposure, or to overweight exposure to specific areas," he says. To protect longer-term holdings he monitors positions frequently and sets trailing stop orders. "Sizable gains and pullbacks are much more frequent in emerging markets than developed ones, especially among the single-country funds. You can't be asleep at the wheel," he cautions. Delfeld also uses ProShares Short MSCI Emerging Markets Fund (EUM), an ETF that moves in the opposite direction of the MSCI Emerging Market Index, when he feels the sector may be ripe for a downturn.
Despite the growing popularity of single-country and sector ETFs, two diversified offerings continue to dominate the emerging market ETF landscape. Both the iShares MSCI Emerging Markets Index and the Vanguard Emerging Markets Index (VWO) share the MSCI Emerging Markets Index as a bogey, but they differ in how their portfolios are structured. The latter ETF holds all the stocks in the index, while the iShares offering uses a sampling subset for replication. Although country and sector weightings are similar, the differences in index composition and structure have added up to produce disparate returns this year. Through the third quarter, VWO was up 75.35% year to date, while the EEM had risen 67.6%, according to Morningstar data.
Smaller diversified emerging market ETFs offer alternatives to the MSCI Index. The PowerShares FTSE RAFI Emerging Markets Portfolio (PXH) tracks a proprietary, fundamentals-based index and has its largest weighting in South Korea. SPDR S&P Emerging Markets (GMM) uses an index that omits South Korea and has a competitive expense ratio of 0.59%. But with average daily trading volume of 81,000 shares and 15,000 shares, respectively, they have yet to develop a sizable fan base.
Emerging market ETFs currently in registration, most of them focusing on concentrated niches within the emerging market universe, provide a glimpse of what to expect in 2010. They include an India Nifty Fifty fund from Barclays; 3X Bull and Bear Shares for China, the BRICs and Latin America from Direxion; a family of emerging market sector funds from Emerging Global Shares; and several dividend-focused emerging market ETFs from WisdomTree.
Carl Delfeld, publisher of Chartwelletfadvisor.com, uses single-country ETFs to complement broader emerging market ETF holdings. "The problem with diversified emerging market ETFs is that they tend to have most of their assets in a few countries, so this is one way to broaden exposure, or to overweight exposure to specific areas," he says. To protect longer-term holdings he monitors positions frequently and sets trailing stop orders. "Sizable gains and pullbacks are much more frequent in emerging markets than developed ones, especially among the single-country funds. You can't be asleep at the wheel," he cautions. Delfeld also uses ProShares Short MSCI Emerging Markets Fund (EUM), an ETF that moves in the opposite direction of the MSCI Emerging Market Index, when he feels the sector may be ripe for a downturn.
Despite the growing popularity of single-country and sector ETFs, two diversified offerings continue to dominate the emerging market ETF landscape. Both the iShares MSCI Emerging Markets Index and the Vanguard Emerging Markets Index (VWO) share the MSCI Emerging Markets Index as a bogey, but they differ in how their portfolios are structured. The latter ETF holds all the stocks in the index, while the iShares offering uses a sampling subset for replication. Although country and sector weightings are similar, the differences in index composition and structure have added up to produce disparate returns this year. Through the third quarter, VWO was up 75.35% year to date, while the EEM had risen 67.6%, according to Morningstar data.