When it comes to portfolio allocation, diversification is one of the key elements to any long-term, buy-and-hold strategy. In recent years, one of the most popular diversifying sectors have been emerging market equities, as these stocks offer tremendous growth potentials and opportunities for lucrative returns. But because this corner of the market can exhibit significantly higher levels of volatility, the downside risk can sometimes be substantial, having significant impacts on bottom line.
So far in 2013, emerging market equities have suffered tremendous losses as the impact of the global economic slowdown weighs heavily on these once rapidly growing economies. The emerging economies hit hardest were once the most promising investments, namely the BRIC nations of Brazil, Russia, India, and China. A closer look at the lineup of emerging market ETFs does reveal several bright spots in 2013.
Of all of the exchange-traded funds that offer exposure to emerging market equities, only six ETFs have managed to beat the market, as represented by the S&P 500 (SPY). These funds have delivered stellar returns, logging in double-digit returns year:
PowerShares Golden Dragon USX China Portfolio (PGJ)
This fund, launched in 2004, is designed to provide exposure to U.S.-listed companies that derive a majority of their revenue from China. Top holdings include Baidu, Ctrip.com International, NetEase, and China Mobile. Given the fund’s unique approach to the Chinese equities market, PGJ has accumulated more than $311 million in assets. The fund has an expense ratio of 0.70 percent, and has returned nearly 52 percent year-to-date.
Guggenheim China Technology ETF (CQQQ)
This fund provides targeted exposure to companies within China’s tech sector, including semiconductor manufacturers, social media companies, search engine and Web-based firms, and manufacturers of computers and other gadgets. The fund is nicely diversified across all market cap sizes, though the majority of the underlying holdings are large- and mid-cap companies. The fund’s expense ratio is 0.70 percent, and it has gained 48 percent so far this year.
Global X NASDAQ China Technology ETF (QQQC)
Yet another China tech ETF, QQQC also offers similar exposure to its Guggenheim competitor, though investors should note QQQC’s relatively low trading volumes and small asset base. It’s expense ratio is a tad less than the Guggenheim fund, at 0.65 percent. QQQC is heavily biased towards large-cap companies, which account for more than half of the portfolio’s total assets. The fund has jumped more than 42 percent this year.
Market Vectors Gulf States Index ETF (MES)
This Van Eck ETF is designed to provide exposure to publicly traded companies that are headquartered in countries belonging to the Gulf Cooperation Council (GCC). The majority of MES’s holdings are financial services companies, though meaningful exposure is given to the communication services, real estate, and industrials sectors. In regards to country allocations, equities from Kuwait, United Arab Emirates, and Qatar dominate the portfolio [see How To Take Profits And Cut Losses When Trading ETFs].
The fund’s expense ratio is on the high side at 0.99 percent. It’s year-to-date return of 27.20 percent tops the SPY fund, but just barely.
First Trust ISE Chindia Index Fund (FNI)
This fund tracks a non-market capitalization weighted index of 50 ADRs, ADSs and/or stocks of companies that are domiciled in either China or India and whose shares or ADRs are listed on a U.S. securities exchange. Holdings are nicely spread across multiple sectors, including technology, consumer, financials, and communication services. Securities from China account for more than half of the fund’s total assets, while Indian securities account for just over one-third. The fund’s expense ratio is 0.60 percent, and has registered a 30 percent gain in 2013.
Wisdom Tree Middle East Dividend Fund (GULF)
This fund tracks a fundamentally weighted index that measures the performance of companies in the Middle East region that pay regular cash dividends. Given the fund’s dividend focus (its distribution yield is 3.02 percent), it is not surprising to see that the majority of the underlying holdings are financial and telecommunication stocks, which together account for more than 80% of GULF’s total assets. In regards to geographic diversification, the fund features exposure to Qatar, United Arab Emirates, Kuwait, Morocco, Egypt, and Oman. The fund’s expense ratio is 0.88 percent, and its year-to-date gain is 31.73.