Investors have two more options today when looking for exchange-traded funds with emerging markets exposure. Emerging Global Advisors has launched the EGShares Beyond BRICs (BBRC, quote) and the EGShares Emerging Domestic Demand (EMDD, quote) as part of their product line, including 19 other theme-specific emerging markets funds.
According to documents, the main impetus behind the funds is problems in the construction and focus of MSCI-based emerging market funds. The MSCI index, on which the popular iShares MSCI Emerging Markets (EEM,quote) is based, holds 44% of assets in BRIC countries and 26% of assets in companies listed in South Korea or Taiwan. EGA argues that these six countries have grown out of their ‘emerging’ status evidenced by the IMF labeling South Korea and Taiwan as advanced and the BRIC nations all within the top ten largest economies in the world.
In fact, as the Beyond BRIC fact sheet shows below, after impressive growth in equity market capitalization earlier in the decade, the BRICs have leveled off. Brazil will struggle with 2% growth this year as investors continue to debate a hard landing in China. India is experiencing its slowest growth in years even as inflation keeps the central bank from enacting more accommodative stimulus.
Of course, the developed world is doing no better, with growth of 2% barely possible in the United States and only a dream in Europe.
Going Where the Growth Is
Enter the 15 countries that make up the Beyond BRICs fund: Chile, Colombia, Czech Republic, Egypt, Hungary, Indonesia, Malaysia, Morocco, Mexico, Peru, Philippines, Poland, South Africa, Thailand and Turkey. In contrast to the slowing growth and population dynamics in the BRIC nations, these countries have continued to see their equity market capitalization increase as a percentage of total world market capitalization. The IMF expects the emerging markets world to expand by 5.6% this year and almost 6% in 2013 against growth of less than 2% in most developed markets.
Population growth, a key component of growth accounting, is projected to increase by 19% to 2030, compared to just 12.6% within the BRIC countries.
The Beyond BRICs fund includes all ten sectors but will exclude relatively-developed countries found in other emerging markets funds like Brazil, Russia, India, China, South Korea and Taiwan. The fund will track the Indxx Beyond BRICs Index, a free-float, market-cap weighted index. The index has a trailing price-earnings of 17.5 times and a 3.25% dividend yield. Companies in the index are fairly large with a median market cap of $15.9 billion.
Emerging markets… but not really
Another criticism of MSCI-based funds has been the weighting to sectors closely related to global growth like financials, energy, materials and industrials. These sectors make up 57% of the holdings in the benchmark EEM fund while consumer and domestic growth plays like consumer goods, telecom, utilities and healthcare account for less than a third of assets. The historic dependence of emerging markets on the energy and materials sectors is the reason behind the old axiom, “when United States sneezes the rest of the world catches a cold.”
The Emerging Markets Domestic Demand fund includes companies from BRIC nations, approximately 45.2% of assets, but focuses exclusively on five sectors believed to benefit from domestic growth. The consumer goods, telecom, utilities and health care sectors are seen as the principal beneficiaries of stronger organic demand within the emerging world.
Since the global recession, emerging market economic policies have been enacted to support sustainable domestic growth and reduce the historic dependence on exports and developed markets. Trade within and between the emerging markets is projected to grow from 6% in 2000 to 38% by 2050.
The fund will track the Indxx Emerging Markets Domestic Demand Index, a free-float, market-cap weighted index that has a trailing price-earnings of 19.2 times and a 2.62% dividend yield. Companies in the index are marginally smaller than in the Beyond BRICs fund, but still relatively large with a median market cap of $11.6 billion.