Emerging-market stocks have been capturing investor interest in the U.S. and much of the developed world's equity markets as risk appetite continues to grow. Advisors wanting to take part in the growth story in developing countries may want to consider some of the emerging-market exchange-traded fund options as a way to get diversified exposure with one trade.
These are countries undergoing rapid growth and industrialization, gradually becoming "advanced" economies or exhibiting some developed-market characteristics such as liquidity in their local debt and equity markets, a standing market exchange and a regulatory market institute.
Emerging markets are in a transitional stage in their development, turning from closed economies into more open market economies, while further reforming their governments. Through reforms and development, these countries aim for stronger and more sustainable economic growth, and they are meanwhile trying to advance their transparency and capital market efficiencies.
The emerging markets have experienced breakneck GDP growth as their young markets develop. As they expand, both their local and foreign investment will begin to pick up. Gradually, if they are given enough time and capital, their total production levels should rise, expanding their GDPs and further diminishing the gap between them and the developed world.
But because emerging markets are in transitional phases, their growth and investment opportunities come with greater volatility and risk. Still, those atttributes may be outweighed by the prospect of greater returns. Emerging market governments are not as stable as the developed world's. Foreign investors must be aware of the risks that one government could nationalize or expropriate assets and possibly suffer the collapse of its domestic capital market. The perceived risks in these countries could prompt quick movements or high volatility in their equity markets.
Emerging market ETFs invest in a basket of securities, either in one developing country or a group of them. These securities have seen robust gains since the start of the year.
Building BRICs
One sector of the emerging markets is the so-called "BRIC" countries: Brazil, Russia, India and China.
The three largest ETFs focusing on this group are the Guggenheim BRIC ETF (EEB), the iShares MSCI BRIC Index Fund (BKF) and the SPDR S&P BRIC 40 ETF (BIK), which have expense ratios of 0.64%, 0.67% and 0.50%, respectively. Though all three funds offer exposure to BRIC-domiciled companies, their country and sector allocations vary. The Guggenheim and iShares funds favor Brazil and China, which make up more than 70% of the allocations in both ETFs. The Guggenheim fund also holds a small allocation of 1.3% in Russia. In contrast, the SPDR ETF leans more toward China, Russia and Brazil holdings, with a low weighting of 4.8% in India. The iShares BKF fund is the most balanced of the three.
Brazil
Brazil is a country rich in natural resources, and the resurging Chinese economy has given a large windfall to this commodity exporter. Brazil also boasts a young demographic that will supply a growing workforce. The country will host the World Cup in 2014 and the Summer Olympics in 2016, and to prepare, it will likely accelerate infrastructure spending to accommodate the influx of global travelers.
One dedicated Brazil fund, the iShares MSCI Brazil Index Fund ETF (EWZ), tries to reflect the performance of a cap-weighted index comprising Brazilian companies. Accordingly, the fund leans toward the major companies, including Brazil's large banks and oil producers. The ETF has an expense ratio of 0.59%.