In addition to dividend-focused products, Global X has been pushing heavily into the emerging market space. These quickly growing countries have been overlooked by many investors, but thanks to some more favorable trading lately, could be making a comeback.
Global X has largely gone off the beaten path in its quest to offer emerging market options to investors, focusing on regions that haven’t been available to many U.S. investors. Its latest products in this vein targeted countries like Nigeria (NGE - ETF report) or Mongolia , while the newest addition to their lineup—the Next Emerging & Frontier ETF: EMFM—seeks to continue the trend.
EMFM in Focus
This new fund from Global X looks to follow the Solactive Next Emerging & Frontier Index, giving investors exposure to a variety of companies from around the developing world. The product looks to charge investors 58 basis points a year in fees, making it a bit cheaper than some of the other frontier market funds out there (see Why Frontier Markets are Still Attractive).
The appeal of this fund looks to be its focus on smaller developing markets that have been largely overlooked by investors, and still absent from many portfolios. In fact, the fund looks to exclude securities from the BRIC nations, in addition to ones from South Korea and Taiwan as well.
A focus that goes to other nations beyond these six giants could produce higher growth rates, and tap into the next round of emerging market all-stars. Plus, since many nations are absent—or are in small quantities—in other emerging market funds, there are also diversification benefits from this approach.
Portfolio in Focus
The fund looks to hold about 200 securities in total, though no security looks to account for more than 2% of the total, though there is a market cap weighting mechanism. Asian stocks dominate at roughly 37.6% of assets, while Latin America (23.3%), Eastern Europe (19.4%), and Africa (13.7%), round out the rest and leave just a little bit for Middle East stocks at 6% of the fund.
In terms of sectors, financials take the top spot at 19.9% of assets, followed by materials (17.3%) and telecoms (13.5%). Energy and industrials also receive double digit weights, while tech and health care aren’t well represented at just 3% combined (read Frontier Markets: A Better Choice for ETF Investors?).
Investors should also note that the index can include ADRs and GDRs, in addition to common stocks. Furthermore, companies must either be based in these emerging nations, or derive at least 50% of their revenues from these markets.
“While emerging and frontier markets may provide ample opportunity for growth, many individual countries and regions are concentrated in particular sectors and have only a handful of liquid names,” said Justin Young, Head of Capital Markets at Global X in a press release. “The Next Emerging & Frontier ETF was designed specifically to address these challenges by providing broad exposure to 35 countries and utilizing caps and liquidity thresholds in an effort to ensure diversified, high quality holdings.”
How does it fit in a portfolio?
This ETF seems like a logical choice for investors who want broad emerging market exposure, but are looking to avoid the big BRIC nations, and the nearly developed South Korean and Taiwanese markets. This strategy could result in higher growth levels, while its low expense ratio compared to its peers makes it a cheap choice as well (read Buy These Emerging Market ETFs on the Upswing).
However, the fund does have a very interesting mix of countries that do not really have much of a theme. Everything from Papua New Guinea and Qatar to Indonesia and Peru are included, so there is pretty diverse mix of nations in the fund.
The space is also pretty risky, and some might feel that the lack of exposure to sectors that benefit from demographic trends—like consumer and health care—are lacking.
ETF Competition and Bottom Line
There are literally dozens of other emerging market ETFs trading, so there is no shortage of other options for investors. However, there are a few frontier market ETFs currently trading, and these look to be the true competitors for the new Global X product (see all the Emerging Market ETFs here).
The two products in this space are the iShares MSCI Frontier 100 Index Fund (FM - ETF report) and the Guggenheim Frontier Markets ETF (FRN - ETF report). The two combine to possess about $450 million in assets under management, and thus are relatively popular with investors (though the lion’s share is in FM).
This could create a bit of a roadblock for EMFM, but it is important to note that the Global X fund handily beats both on the expense front, so it could attract cost conscious investors. Still, the other two are ‘pure’ frontier market funds, so one could argue that they are different from the Global X fund.
It will be interesting to see if investors agree with this assessment, or if they view this as a better way to gain exposure to the emerging market space. This could be especially true for those who are sick of the somewhat overbearing influence of the six mega nations that tend to dominate most developing world investments, though only time will tell if EMFM is their preferred way to accomplish this task.
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