Emerging-market ETFs now come in many shapes and sizes, but for those investors who want exposure to this area, a broad-based fund might be the best place to start. With one investment, you can spread your dollars across a number of countries and currencies and get exposure to some of the fastest-growing economies in the world. Some emerging-market ETFs are more diversified than others, and it can pay to kick the tires of these funds and get an idea of their makeup.
BGI, State Street, Vanguard, and PowerShares each offer emerging-market ETFs. BGI's iShares MSCI Emerging Markets Index (NYSE: EEM ) and Vanguard's Emerging Markets ETF (AMEX: VWO ) are both heavyweights in this arena, with more than $16 billion in assets apiece.
PowerShares' BLDRS Emerging Markets 50 ADR Index Fund (Nasdaq: ADRE ) is the granddaddy of the group. Even though the fund has been around for almost five years now, its assets of $450 million are well below those of the two goliaths. It is technically not an ETF, but a unit investment trust. The new kid on the block is State Street's SPDR S&P Emerging Markets ETF (AMEX: GMM ) , which in the few months of its existence has gathered only $19 million in assets.
Different but similar
The four selected funds have a wide range of expenses; MSCI Emerging Markets Index has the highest expense ratio at 0.77%, followed by the SPDR S&P Emerging Markets ETF at 0.60%, while Vanguard's Emerging Markets ETF and the BLDRS Emerging Markets 50 ADR Index Fund each charge half as much at 0.30%. The funds also differ significantly in the number of securities they hold in their portfolios. The BLDRS index fund has the fewest holdings with a mere 50 ADRs, while the Vanguard fund bulges with nearly 800 securities, close to twice what any other fund holds.
When it comes to picking a place to invest their assets, these four funds have a preference for Asia and Latin America. These two regions make up the majority of these funds' investments, with Asia looming the largest at close to 50% for all four. Country exposure is also heavy in Brazil and South Korea, which attract the most assets from these funds, followed by China and then Hong Kong.
In 2006, the MSCI Emerging Markets Index and the Vanguard fund both had returns close to 30%, while the BLDRS Emerging Markets 50 ADR Index Fund was the best performer of the bunch with a total return of nearly 38%. That lead has carried over into 2007, and it's still ahead of the pack.
Fund by fund
iShares MSCI Emerging Markets Index, as its name suggests, tracks the performance of the MSCI Emerging Markets Index. The fund has 278 holdings, with South Korea, Brazil, and Hong Kong making up 15%, 12%, and 11% respectively. As with most funds in this group, there is a decided Asia focus to the fund -- 50% of its assets are invested in this region. The fund also has significant exposure in Latin America, with 21% of its assets invested there. Its portfolio is focused on manufacturing, which at 43% of assets is its largest segment, followed by services at 31% and information at 25%.
The fund with the largest number of stocks in its portfolio, the Vanguard Emerging Markets ETF, tracks the MSCI Select Emerging Markets Free Index and has a massive 794 holdings. South Korea, Taiwan, and Hong Kong make up 16%, 13%, and 11% of the fund, respectively. Like its twin titan MSCI Emerging Markets Index, the Vanguard fund tilts heavily toward Asia with 54% of its assets invested in this region, along with 18% in Latin America. Its largest segment, as with its twin, is manufacturing, at 46%, followed by services at 33% and information at 21%.
The fund with the smallest amount of holdings in its portfolio, BLDRS Emerging Markets 50 ADR Index Fund, tracks the Bank of New York Emerging Markets 50 ADR Index, a capitalization-weighted index designed to track the performance of a basket of emerging-market-based depositary receipts. Brazil, China, and South Korea make up 26%, 15%, and 14% of the fund, respectively. Two regions, Asia at 47% and Latin America at 38%, make up the largest areas of investment for the fund. Manufacturing is the fund's largest sector at 39%, followed by information at 37% and services at 23%.
The newest listing of the four is the SPDR S&P Emerging Markets ETF. The fund has 449 holdings, with China, Brazil, and South Africa making up 16%, 14%, and 11%, respectively. There is definitely an Asian tilt to the fund -- 50% of its assets are invested in this region, along with 21% in Latin America. Financial, energy, and materials are the fund's largest sectors at 20%, 18%, and 13%, respectively.
Volatile and risky
Because of the potential for wide swings in performance, emerging-market investments are not suitable for every investor. These markets are in transition and can be unstable because of changes in government, nationalization, expropriation, or even the collapse of capital markets. Exchange-rate fluctuations can cause significant adjustments in asset values, and speculators can rapidly drive currencies one way or the other. Emerging markets are also subject to the risks associated with their relatively small size and lower liquidity levels. As a case in point, China has been an exciting and profitable market, but considering its high valuation, other emerging markets might be well worth considering. If you think China is overpriced at this point, you might want to avoid the funds with the heaviest exposure to this country, which are the BLDRS Emerging Markets 50 ADR Index Fund and State Street's SPDR S&P Emerging Markets ETF. On the other hand, if you think that bull still has legs, load up on these funds.
Broad-based emerging-market ETFs can help an investor minimize country, industry, market, and currency risk. Emerging markets offer opportunities for significant returns, especially for a U.S. investor who faces a mature domestic economy. However, investors need to determine the level of acceptable risk they are willing to take on before investing in these markets. Emerging markets are not for every investor, and even those who decide to dip their toes in should only invest a small portion of their assets in these markets.
Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds mentioned in this article. The Motley Fool has a disclosure policy.