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Emerging markets and their corresponding ETFs have been performing poorly this year due to a slowdown in domestic demand, the lingering Eurozone crisis (which can impact exports), and strengthening of the U.S. dollar (read: Three Country ETFs Struggling in 2013).
This year is proving that investing in emerging markets also demands a steady appetite for risk as most of these nations are commodity-centric economies which make them susceptible to any downtrend in the global economy.
Currency risk is also a factor that is ubiquitous as far as emerging market investments are concerned. This is especially apparent now that the dollar is surging, leaving repatriated local currency investments in a sluggish state.
In addition to these woes, high inflation and interest rates in the emerging markets, especially compared to the developed market counterparts, are creating pressure. This situation is making it somewhat difficult for certain emerging markets to grow at a solid clip, marking one of the first times in years that this has been the case.
Nevertheless, it is not entirely correct to say that all the emerging markets ETFs are lagging so far in 2013. A couple of funds have impressed with their performances so far this year as these offer more in terms of diversification across various emerging nations (read: Time to Buy Emerging Market ETFs?).
Not only do these nations have greater growth potential, they often have lower levels of correlation with their developed market counterparts and typically higher yields. This makes them attractive destinations for aggressive and income seeking investors.
Further, 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 much of the global consumption.
Below, we have highlighted the three top ETF performers which have not only managed to stay profitable, but have provided handsome returns in the year-to-date timeframe (see more in the Zacks ETF Center). These are poised for strong growth further into 2013, considering a strong growth momentum in the emerging economies and attractive valuation of stocks:
EGShares Consumer Goods GEMS ETF
Launched in June 2011, this ETF tracks the Dow Jones Emerging Markets Consumer Goods Titans 30 Index, which measures the performance of the largest emerging market companies in the consumer goods industry.
The product holds a total of 30 securities with a large concentration on the top 10 holdings (roughly 55% of assets). Also, the fund has a slight tilt towards one stock – Cia de Bebidas das Americas – with 10.2% of the assets.
From a sector perspective, food producers take the top spot with roughly one-third of the assets, while beverages, automobiles and personal goods rounded up to the next three spots in the basket.
In terms of individual countries, Mexico enjoys the top spot with a share of 23.9% while Brazil, India, Indonesia and China also get double-digit allocations with a share of 16.50%, 13.90%, 12.1% and 11.0%, respectively (read: Inside the Surging Mexico ETF).
The product failed to garner investor interest with AUM of $2.5 million and a paltry volume of about 1,000 shares per day. This indicates a wide bid/ask spread, thereby increasing the total cost for the fund beyond the expense ratio of 0.85%. The ETF added 7.28% in the year-to-date timeframe while yields little 0.94% in annual dividend.
EGShares Health Care GEMS ETF
This fund targets the healthcare industry in emerging markets by tracking the Dow Jones Emerging Markets Health Care Titans 30 Index.
With a total of 30 stocks in its basket, the product is heavily concentrated on it top 10 holdings with 59.50% of assets. The top three firms – China Aspen Pharmacare, Sun Pharmaceutical and Life Healthcare – comprise about 26.90% of the combined share in the basket.
While the product allocates 65.2% in pharmaceuticals & biotechnology, healthcare equipment & services take the rest in the basket. The ETF spread out across the entire spectrum of asset classes with 49% in mid cap, 40% in large cap, and 11% in small cap (read: 5 Sector ETFs Surging to Start 2013).
In terms of country allocations, India is at the top (30.9%), followed by South Africa (29.3%) and China (18.3%). HGEM is an unpopular ETF in the emerging market space with just $5.9 million in AUM and average daily volume of 4,000 shares.
Due to this illiquid nature, the ETF is a relatively high cost choice with a wide bid/ask spread and expense ratio of 0.85%. The fund gained 6.90% year-to-date and yields little (0.17%) in annual dividends.
First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS - ETF report)
This is a new fund introduced in Feb 2012 and since then managed assets of just $3.7 million. The ETF provides exposure to small cap emerging market by employing the AlphaDEX methodology. This methodology uses fundamental growth and value factors to select stocks from the S&P Emerging Markets BMI universe.
Hopefully by using this methodology, and giving higher weighting to more favorably ranked firms, FEMS should generate positive alpha relative to traditional passive indexes. The fund has a total of 203 securities in the portfolio.
In terms of the overall portfolio, the product is highly exposed to three main sectors – industrials, consumer discretionary and financials – each representing at least 18% share on average.
From an asset individual perspective, the fund does an excellent job of spreading out assets as none of the stocks makes up more than 1.04% of FEMS, suggesting minimal company-specific risk and prevention of heavy concentration.
Country exposure is tilted towards China at 32.79% of the total while other countries like Thailand, Indonesia and Taiwan make up for less than 10% of assets in the basket (read: Buy China on the Dip with These 3 ETFs).
This product also has a wide bid/ask spread, trading in volumes of less than 2,000 shares per day. It costs 80 bps in fees per year from investors. The fund has added 8.86% year-to-date and pays a good dividend yield of 1.84%.
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