Over the past decade, emerging markets have become increasingly popular among a wide range of investors. These rapidly developing nations are experiencing exceptional growth rates, generally have low levels of debt, and have trade balances that are either even or skewed heavily in their favor. While any number of emerging nations could be chosen for purchase, many continue to, time and time again, gravitate back towards the BRIC bloc.
This group of four nations, which consists of Brazil, Russia, India, and China, represents some of the largest and most powerful developing economies on earth. In fact, some believe that these four could, by the middle of the century, grow to rival the economic prowess of the entire G7. Given the earth shattering implications of this trend, many investors have sought to get more exposure in their portfolios to this surging group. Yet, individual security options remain poor at best leaving emerging market ETFs as one of the few choices for long-term investors (read Forget FXI: Try These China ETFs Instead).
While many of these products have done quite well over the past few years, 2011 has been a pretty rough time for emerging market ETFs. Inflation worries in India and Brazil have combined with a possible slowdown in China and surging political risks in Russia to cause many investors to reconsider their allocations to the space. Furthermore, a strong dollar and a great deal of risk aversion haven’t helped matters either, pushing investors back into the safest corners of the American equity market for the time being (read Three Low Beta Sector ETFs).
Yet despite these short-term woes, the long-term futures of these nations remain incredibly bright as a whole. Predictions still call for the bloc to make up close to 40% of world GDP by 2050 and for all four to be among the top five economies on Earth by that time. Thanks to these trends, now may be the perfect time to get in on the bloc for the long haul, buying securities at a steep discount to their prices just a few months ago. For these investors, we highlight some of the key differences of the major funds in the space that investors should take into account before choosing the right BRIC ETF for their portfolio:
Guggenheim BRIC ETF (EEB)
This emerging market ETF tracks the Bank of New York Mellon BRIC Select ADR Index which invests in a universe of depository receipts from any of the BRIC nations. The product will put at least 90% of its assets in these ADRs and GDRs in order to achieve its exposure. Currently, the fund consists of 90 securities and it is heavily exposed to Brazilian and Chinese firms which make up close to 80% of total assets leaving little for companies in India and especially Russia which accounts for just 1.3% of the basket (see Alternative ETF Weighting Methodologies 101).
In terms of sector exposure, the fund has heavy weightings to energy (24.9%) and financials (17.2%), as well as close to 15% in both telecom and materials. It should be noted, however, that the product is underweight in industrials, health care, and utilities, as these three sectors combine to make up less than 7% of the total assets. For individual holdings, Petrobras (PBR - Analyst Report) takes the top spot, but it is closely trailed by China Mobile (CHL - Snapshot Report) and Vale (VALE - Analyst Report). Despite the fund’s heavy concentration in Brazil and China, it is quite popular having amassed close to $430 million in assets since its launch about five years ago. 2011, however, has been a pretty rough year for EEB as the product has declined by 22.8% since the start of January. Over the past five years though, things have gone much better as the product has gained 17.6% in that time frame.
iShares MSCI BRIC ETF (BKF)
iShares’ entry into the BRIC space is BKF, a fund that tracks the MSCI BRIC Index. The fund has close to 325 securities in total giving it a wide basket of securities in the BRIC nations. Much like EEB, BKF has a heavy concentration in China and Brazil although it is less so than its Guggenheim counterpart. In fact, BKF puts about one-third into both China and Brazil while allocating close to 14% for Russia and India (see Does Your Portfolio Need A Hedge Fund ETF?).
Sector exposure is also concentrated into two sectors with financials and energy making up nearly 50% of the portfolio. Beyond these two, materials (11.6%), telecom (7.8%) and consumer staples (7.6%) round out the top five for the fund while utilities and health care again reside at the bottom of the list. Top individual holdings include the giants China Mobile and Petrobras, but Gazprom , the Russian oil and gas colossus, takes the top spot at just under 4% of assets. BKF hasn’t had a very good year in terms of performance either; the fund has fallen by 26.4% since the start of 2011. However, the fund’s solid dividend of 2.5% has likely helped to cushion the blow for most investors in this time.
SPDR S&P BRIC 40 ETF (BIK)
For a more concentrated play on the BRICs, this SPDR could make for an excellent choice. The fund tracks the S&P BRIC 40 Index which focuses in on a subset of the constituents of the S&P/IFC Investable (S&P/IFCI) country indexes for Brazil, Russia, India and China. This series is designed to measure the type of returns foreign portfolio investors might receive from investing in emerging market stocks that are legally and practically available to them. China dominates the holdings of this fund at close to 48% of assets and is trailed by hearty levels of exposure to Brazil (25.3%) and Russia (19.9%) while Indian stocks make up the small remainder (Go Local With Emerging Market Bond ETFs).
Sector exposure is focused in on two industries; energy and financials, as these two combine to make up close to two-thirds of total assets. Interestingly, consumer discretionary and health care are nowhere to be found in the fund while utilities make up just under 1% of the holdings. Gazprom currently takes up the biggest allocation at 8.4% and the firm is trailed by two Chinese firms, China Construction Bank and China Mobile, to round out the top three. Like the other funds on the list, BIK has had a forgettable 2011 losing 21.2% since the start of January. Fortunately, the fund does have favorable valuation metrics such as a 2.4% dividend yield and a forward P/E of just 7.2, figures that could help the fund rebound in 2012 and beyond.
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