Investment in emerging markets have increased in recent years as many have sought out these higher risk nations in a quest for above average returns. Furthermore, these markets often offer up more in terms of diversification, so many have looked abroad in order to better spread out their portfolios as well (see Do Country ETFs Really Provide Diversification?).
Yet these markets aren’t always golden as they are generally characterized by a developing economy, inferior sovereign credit rating (especially compared to developed markets), and relatively high levels of unemployment. However, over the past decade as developed market woes have built up, things have changed dramatically.
With globalization, many emerging markets have become vital contributors to the overall global economic growth picture. In fact, the rising population and increasing per capita income in these economies make them accountable for a bulk of global consumption at this point in time (read Access the $30 trillion Consumer Market with These ETFs).
However, investing in emerging markets demands a steady appetite for risk as most of these nations are commodity centric economies which makes them high susceptible to any downtrend in the global economy.
Currency risk is also a factor that is omnipresent as far as emerging market investments are concerned. The high inflation and interest rates in the emerging markets, especially compared to the developed market counterparts, creates pressure on the exchange rates causing the emerging market currency to depreciate.
Thus, these investments can massively take a hit arising out of currency fluctuations even if the underlying asset class generates positive returns(see Currency Hedged ETFs: Top International Picks?).
Still, their fairly liquid equity markets with low levels of correlation with the developed country equity markets and typically high yields (due to the high interest rate scenarios) make them attractive destinations for aggressive, as well as income seeking, investors.
With this backdrop, a look at the Zacks Top Ranked Emerging Market ETF, the BLDRS Emerging Markets 50 ADR ETF (ADRE), could well be of interest to investors seeking basket exposure in this exciting slice of the market that can hopefully mitigate some of the top risks highlighted above:
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, region, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the emerging markets, we have taken a closer look at the top ranked ADRE below:
BLDRS Emerging Markets 50 ADR ETF (ADRE)
ADRE seeks to match the performance and yield of the Bank of New York Mellon Emerging Markets 50 Index before fees and expenses. The index includes American Depository Receipts of 50 companies from the emerging market space.
Although all of its total assets are exposed to the international equity markets, the ETF has successfully eliminated exposure to currency risk by focusing on depository receipts which are listed in the U.S markets and denominated in U.S. dollars.
Therefore, one of the biggest worries of emerging market investing is mitigated. This coupled with a low expense ratio of 30 basis points clearly gives ADRE an upper hand over other options available to investors for an emerging market exposure.
Naturally, the ETF has a strong correlation with the U.S. equity markets as indicated by an R-Squared value of 79.58% versus the S&P 500 index. Nevertheless, the ETF is known to exhibit less vulnerability offering a low risk opportunity for investors as it has an annualized standard deviation of just 24% which can be considered low considering the volatile nature of emerging market funds (see more in the Zacks ETF Center).
Also, the ETF has a decent asset base of about $317 million and does a daily volume of around 41,500 shares. The ETF is currently trading at attractive valuations of 1.59x its trailing twelve month book value and 11.96x its trailing twelve months earnings, so it could be a value choice as well.
From a sector viewpoint, ADRE relies heavily on a few sectors, with Energy (22.26%), Telecommunication Services (19%) and Financials (17.33%) being allotted the most exposure.
From an individual holdings point of view, the fund does well in allocating just around 46% of its total assets in top 10 holdings and holds 50 securities in total. The ETF prioritizes its bets across the bigger emerging market economies like Brazil (31.40%), China (19.29%) and Mexico (9.22%).
The ETF has been somewhat weak for the trailing one year period, primarily because of its heavy focus on Brazilian large cap equities which have clearly underperformed within the time frame in question (read Time to Worry about Brazil ETFs?).
However, the fund has a solid yield of 2.59% and could make for an interesting choice due to its low risk nature. ADRE currently has a Zacks Rank of 1 or ‘Strong Buy’ suggesting that our system is looking for outperformance ahead for this product.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>