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Avoid Russia with This Better BRIC Emerging Market ETF

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After a dismal 2013, many emerging markets have come out quite well this year and some have even managed to easily crush the returns of the broad U.S. equity market ETF.  Positive developments in certain key emerging markets such as China and India supported the rally in these stocks.

However, trouble for the BRIC nations comprising Brazil, Russia, India and China seems to be never ending at least for the time being. While QE taper threat had plagued these nations last year, geopolitical crisis has acted as a dampener this year (read: 3 Emerging Market ETFs Hitting 52-Week High amid Instability).

This is especially true as Russia has almost made itself the West’s top enemy after its annexation of Crimea. In protest, the U.S. and the European Union (EU) have imposed a host of sanctions on Russia. Most recently, the West has launched sanctions against Russia’s all important energy, banking and defense sectors. As a result, Russia has retaliated by imposing a ban on food imports from the West. 

Analysts believe that this turmoil is expected to further slowdown the Russian economy and might lead the nation into a recessionary trap. Russia is already grappling with fragile consumer demand, slowing retail sales, sluggish investment, high inflation and interest rates.

In this situation, investors are exiting the Russia ETF space and all the ETFs from the segment have seen negative performance in the year-to-date frame. The negative performance from the Russian equities have also acted as dampeners for BRIC ETFs like iShares MSCI BRIC Index Fund (BKF), Guggenheim BRIC ETF (EEB) and SPDR S&P BRIC 40 ETF (BIK) (read: Be Wary of These 3 BRIC ETFs on Russian Issues).

While strong performance from Indian, Chinese and Brazilian equities led these BRIC ETFs higher, weak performance from the Russian markets undermined the gains. Moreover, the Russian crisis has also slightly dampened the overall performance of the emerging market equities.

Is There Any Option?

In this situation, investors seeking to have a combined exposure to India, China and Brazil would definitely be craving for an emerging market ETF that doesn’t have exposure to Russian equities.

Those who feel so should consider themselves lucky as the First Trust BICK Index Fund (BICK) provides exposure to the BRIC nations excluding Russia. As a substitute, the ETF provides exposure to South Korea instead (hence the name ‘BICK’).

Before we highlight the details of BICK, let’s have a look at South Korea’s performance.

South Korea in Focus

While South Korea is definitely facing some economic challenges, the country has recently taken some key steps to fight back (read: Korea ETFs in Focus on Stimulus Plan, Interest Rate Speculation).

The Korean government has recently unveiled an $11 billion stimulus package to bolster its weakening economy. The government is making structural changes to boost domestic demand and reduce Korea's dependence on exports. The government has relaxed limits on mortgage loans to bring some life back to the ailing property market.

Moreover, South Korea reduced its benchmark interest rate this month for the first time in 15 months by 25 bps to 2.25%. This is expected to further support the nation’s recovery.

Considering the improving fundamentals in India, China and Brazil and chances of a revival in South Korea, we have highlighted below details about the BICK ETF for investors keen on gaining exposure to these nations, and not the turbulent Russian market:

BICK ETF in Focus

The fund seeks to track the ISE BICK Index to provide exposure to the largest and most liquid public companies based in Brazil, India, Mainland China and South Korea. Moreover, the index uses an equal weighted allocation methodology to provide equal exposure to the four nations. Thus, each nation will have a 25% weighting in the fund at each rebalance.

BICK currently holds a well-diversified basket of 91 stocks. None of the individual stocks has more than a 2% allocation in the fund.  Tata Motors Limited (ADR), Mahindra & Mahindra Ltd. (GDR)        and ICICI Bank Limited (ADR) take the top three spots in the fund.

Sector-wise, financials dominates the fund with 29.6% exposure, followed by information technology (16.5%), consumer discretionary (13.93%) and materials (12.08%) (see Broad Emerging Market ETFs here).

However, the fund is unpopular and illiquid with a small asset base of $19.2 million and average trading volume less than 3,000 shares a day. The ETF charges 64 basis points as annual fees and has a dividend yield of 1.38%.

Nonetheless, BICK has delivered a decent return of 10% in the year-to-date frame and might start gaining investor interest if it can deliver some good performance going forward. This might be true if India, China and Brazil continue to perform well and the South Korean economy sees a revival backed by stimulus measures.

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