Emerging markets have seen unfavorable performances this year due to feeble demand and sluggish currencies. Consequently, investors have pulled huge amounts of capital out of this market over the past couple of months.
In fact, the two ultra-popular funds – Vanguard FTSE Emerging Market ETF ((VWO - ETF report) ) and iShares MSCI Emerging Markets Index Fund ((EEM - ETF report) ) – have seen combined outflows of over $3.3 billion in the last three months.
State Street, the second-largest ETF provider globally, however, seems unperturbed by fading investor confidence in emerging markets. In fact, it even plans to bring in some more ETFs in the emerging market space.
According to the latest filing with SEC, the firm offered up plans for a new SPDR MSCI Beyond BRIC ETF that could give investors a fresh way to tackle emerging market securities outside the BRIC countries (read: Are BRIC ETFs in Trouble?).
A great deal of key information – such as expense ratio and the individual holdings breakdown – was not available in the initial SEC document, but other important points were released in the filing. We have highlighted those below for investors interested in a new emerging equity play from State Street should it clear regulatory hurdles:
Proposed ETF in Focus
The proposed ETF looks to follow the MSCI Beyond BRIC Index using sampling strategy. The index focuses on 17 developing countries (excluding BRIC) including Chile, Colombia, the Czech Republic, Egypt, Hungary, Indonesia, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, South Africa, South Korea, Taiwan, Thailand and Turkey (see more in the Zacks ETF Center).
This will give the ETF broad exposure to a number of countries which are important emerging markets, but which are usually overlooked in many other emerging market funds. After all, in both EEM and VWO, holdings in the four BRIC countries make up at least 38% of assets, suggesting this proposed EMBB could have a very different risk-return profile.
How does it fit in a portfolio?
This new fund, if approved, could be an interesting option for investors seeking diversified exposure in the global ex-developed market. This product would allow investors to tap the still beaten down emerging economies that are showing clear signs of a quick recovery (read: 3 Emerging Market ETFs Surviving the Slump).
These nations could be interesting plays in the future as their valuations are quite favorable at current levels and growth rates are still quite high compared to many of the developed nations.
The IMF recently lowered its growth forecast for the emerging nations to 5% for this year and 5.4% for the next. According to the agency, the worst performers would include the BRICS (Brazil, Russia, India, China and South Africa) nations. The IMF slashed 2013 economic growth outlook by 0.5% to 2.5% for Brazil, 0.9% to 2.5% for Russia, 0.2% to 5.6% for India, 0.3% to 7.8% for China, and 0.8% to 2% for South Africa (read: Avoid These 3 Emerging Market ETFs).
As the proposed ETF looks to avoid the BRIC nations, the State Street’s potential offering could make a splash in the space.
Can it succeed?
Fortunately for State Street, there is only one ETF provider that offers exposure to the emerging markets excluding the BRIC countries. This includes the EGShares Beyond BRICs ETF (BBRC - ETF report) that has accumulated $10.3 million since its debut a year ago (see: all the Emerging Market ETFs here). The fund holds 50 securities in its basket and charges 85 bps in fees a year from investors. The ETF is down nearly 13% so far this year.
So the proposed State Street fund, if approved, could give investors a second alternative to play the emerging markets beyond BRIC. But given the low level of interest and negative returns so far in the recent emerging market slump, it is hard to say how EMBB will perform should it pass regulatory hurdles, though continued interest and diversification in the space should be welcomed by long term investors seeking new options.
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