For many investors, emerging-market ETFs have evolved from an exotic investment offshoot to a portfolio staple. In 2011, Vanguard's MSCI Emerging Markets ETF (VWO), the largest of the group, had the heftiest inflows of any exchange-traded fund-an especially notable milestone given that its net asset value plunged nearly 19% that year. That ETF and another following the same index, the iShares MSCI Emerging Markets Index Fund (EEM), now hold a total of $80 billion in assets.

These two powerhouses have plenty of likable qualities. Their low cost, liquidity and convenience have opened the doors of growing markets such as China, Brazil and India to thousands of investors, who hope these countries have stronger economic growth than the U.S. and other developed nations and thus offer higher long-term stock market returns.

But investors in these funds are also concentrated in a handful of countries, and that limits their diversification benefits. The iShares offering, for example, has 58% of its assets in China, Brazil, South Korea and Taiwan. (By some measures, the latter two countries are rapidly becoming developed markets.) South Africa, India and Russia account for another 21% of assets.

"That leaves roughly 20% of the rest of the emerging world," says Zacks Research ETF strategist Eric Dutram. "Most investors are heavily concentrated in a few countries and could stand to look at some national ETFs to round out their emerging markets exposure." Other investors might benefit by augmenting the "Big Two" emerging market ETFs with single-country or regional ETFs to get more exposure to areas they believe will outperform other global markets.

The list of ETFs that can accomplish these goals is as vast and wide-ranging as the countries they represent. The database at Indexuniverse.com shows 108 emerging-market offerings focusing on specific countries or regions-or even on specific stock market capitalizations or market sectors within those regions. The single-country ETFs can focus on established markets such as Brazil and China or far-flung countries such as Vietnam and Poland. Among the biggest winners so far this year are iShares' MSCI Brazil fund (EWZ) and WisdomTree's India Earnings ETF (EPI). The former was up 15.63% in January alone, while the latter rose 23.59% for the month.

The values of these focused ETFs, however, often careen around more than the already-volatile broader emerging market indices. For example, the WisdomTree offering's snapback in early 2012 was preceded by a decline in 2011 of more than 40%, about double the slide for the broader emerging market indexes. Other India-focused ETFs fell by a similar amount.

Despite such volatility, proponents say advisors could benefit by augmenting broad-market emerging market exposure with more narrowly focused bets.

"The problem with the large, broad-based emerging market ETFs is that they focus on large-cap companies that rely on exports for most of their revenue," says Adam Patti, chief executive officer of IndexIQ, which specializes in indexed-based investments. "So even though those companies are based in emerging-market countries, they are not pure emerging-market plays. And their businesses are vulnerable to developed-market economic cycles."

He also notes that the popularity of the two largest emerging-market ETFs has made emerging-market large caps less attractively valued than those in the small and mid-cap space and reduced their dividend yields. "There is a lot of money chasing those two ETFs around, and that is bound to have impact," he says.

Patti says the IQ Emerging Markets Mid-Cap ETF (EMER) addresses those issues by tracking midsize companies, which derive most of their revenues from their home countries. Because they are less well-followed by analysts than large caps, he says, they also have more reasonable valuations. The IQ South Korea Small Cap ETF (SKOR) gives investors exposure to that country's economy beyond large exporters such as Samsung.

At another firm, Van Eck Global, marketing director Edward Lopez estimates that roughly 45% of the $3.6 billion in assets in the firm's 13 single region and country emerging-market ETFs comes from financial advisors. Last year, falling returns in most emerging markets prompted many investors to sell their positions, he says.

But as markets improve this year, a number of the firm's Market Vectors ETFs are seeing strong investor inflows again. In January alone, the Market Vectors Indonesia Index ETF (IDX) took in $112 million, while the Brazil Small Cap ETF (BRF) drew $58 million and the Market Vectors Russia ETF (RSX) attracted $109 million.

Portfolio Strategies
Financial advisors who've already begun using ETFs to fine-tune emerging-market exposure say they can be a good way to refine strategies in the asset class. "We prefer to have the mutual funds as the core of emerging market portfolios because we believe the right managers can add value," says Ron Weiner, the president of RDM Financial in Westport, Conn. "At the same time, we periodically use focused emerging-market ETFs to fill in some of the gaps in those funds."

Two years ago, for example, Weiner's analysis showed that the three emerging-market mutual funds his firm invested in were relatively light in Latin America, an area he believed was ripe for growth because of its growing population and abundant natural resources. To shore up holdings in the region, he purchased the iShares MSCI Brazil Index fund (EWZ).

By the beginning of 2011, his firm had about 10% of its equity assets in emerging markets; about 4% was allocated to the Brazil fund and to another focused ETF, the EG Shares Emerging Markets Consumer ETF (ECON). But as the markets began to slide, he sold the ETFs early in the year, while continuing to hold on to the mutual funds.

"I like that I can use the narrowly focused ETFs as positions that I can micromanage without having to make a big bet," he says. "It's easy to add to or lighten up around the edges with positions that account for a small part of the portfolio."

Weyman Gong, the chief investment strategist at Signature Financial Management in Norfolk, Va., uses the "Big Two" emerging market ETFs as well as actively managed mutual funds as core holdings, and then uses single-region ETFs as satellites around those positions. "Many people lump emerging markets into one big group," he says. "But Brazil and Russia have very different dynamics from China."

Slower growth in China has raised concerns among some investors. The World Bank expects gross domestic product growth in the country to come in at 8.4% this year when it was 9.2% last year and 10.3% in 2010.

Gong still believes China's stock market will outperform others. "Even though Asian economies are growing more slowly than they have in the past, they continue to outpace growth in developed countries," he says. "And because the equity markets in Asia were punished so severely last year, the valuations in China and other Asian markets are still quite reasonable." To overweight the region, Gong uses an actively managed mutual fund as well as the iShares MSCI China Index Fund (MCHI) and the iShares MSCI All Country Asia ex-Japan fund (AAXJ).

Picking A Spot
For those considering more focused emerging-market ETF exposure, the question is which countries and regions to emphasize. Among analysts, there's a wide difference of opinion on that subject.

In a recent report, Dutram points to Turkey as "a rapidly growing country that often doesn't get the respect it deserves." Despite having GDP output that's larger than Taiwan's, the nation makes up just 1.3% of the MSCI Emerging Markets Index, while the latter country has a double-digit share.

One ETF, the iShares MSCI Turkey Investable Market Index Fund (TUR) offers exposure to about 100 Turkish market securities. Because it has more than 40% of its assets in financials, the ETF fell sharply last year. But Dutram believes that the Turkish market stands to benefit as the European debt crisis moves to the back burner and investors feel more comfortable with financial stocks.

Another focused play Dutram likes is Indonesia. Unlike export-dependent companies in Southeast Asia, he says, those in Indonesia rely mainly on domestic consumption and are less sensitive to slowdowns in developed world economies. Two ETFs zero in on this country: the Market Vectors Indonesia index ETF (IDX) and the iShares MSCI Indonesia Investable Markets Index (EIDO). (Dutram discloses that he has a personal investment in the Market Vectors ETF.)

Ned Davis research analyst Anthony Welch is bullish on Brazil, Russia, India and China, better-known over the last decade as the BRIC nations. "With a miserable year in 2011 behind us, we expect the BRICs to help lead the global market upward," wrote Welch in a report to clients in late January. He said these countries have demonstrated their ability to manage the delicate balance between controlling inflation and maintaining economic growth. For that reason, as well as the signs of stabilization among global economies, his outlook is optimistic.

BRIC markets also tend to have a high correlation to commodity prices, which the firm expects will rise this year. Although Welch does not make specific investment recommendations, the iShares MSCI BRIC Index fund (BKF), the Guggenheim BRIC ETF (EEB) and the SPDR BRIC 40 fund (BIK) all focus on the space.

An iShares report earlier this year points to Latin America as "our favorite region within emerging markets. We expect Latin America to post good relative growth this year." The report also notes that the region has good corporate-sector profitability and is less likely to default than some other emerging market countries, especially those in Europe, the Middle East and Africa.

The firm also likes Russia as "a short-term tactical play for more aggressive investors looking to increase emerging-markets exposure. Russia's economy continues to hold up well, reflected in Russia scoring well against other countries on leading indicators; it has little debt, and its core inflation is stabilizing."

The iShares S&P Latin America 40 ETF (ILF) and the iShares MSCI Russia Capped Index fund (ERUS) are two ways to implement those recommendations. Other options that focus on those locales include the Direxion Latin America Bull 3X fund (LBJ), which uses leverage, and the Market Vectors Russia fund (RSX).