ETF Teardown: Top Emerging-Market Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain common elements. For example, if investors want to capitalize on tantalizing opportunities in emerging markets, they can buy shares in Vanguard Emerging Markets ETF or iShares MSCI Emerging Markets Index Fund (NYSE:EEM), which invests in diverse stocks from countries such as Brazil, Russia, and Taiwan.

But since these ETFs invest in multiple stocks, their broad diversity also limits your upside. For an investor who was, say, really hip to opportunities in the emerging Chilean market, but cold on the future prospects of Southeast Asian stocks, these ETFs wouldn't fit the bill.

Fear not -- in this edition of "Teardown," we'll look for ways to discover the best emerging-market stocks out there. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors quickly locate great stocks, any of the 4,900 rated stocks profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.

Selecting a tag in CAPS for an emerging market such as China, Argentina, or Chile presents a list of potential investments to consider. For instance, the "China" tag returns 78 companies with significant exposure to the Chinese market that trade on American exchanges. This particular collection of investments has done well in the past year, up 29.3% versus the S&P gain of only 12.4%. The "Chile" tag pulls up a dozen companies that have collectively returned investors an impressive 49.9% in the past year.

To gauge which companies the CAPS community thinks offer the best opportunities in emerging markets today, we'll sort these businesses by their CAPS star rank (from one to the maximum five stars). We can then examine each individual company to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Getting down to the nitty-gritty
Here are a few of the highly rated stocks our screen of Chilean and Argentinean stocks pulled up today.

With the rapid economic expansion in many emerging markets, it's not surprising to see stocks from basic industries such as mining and natural gas on our list. CAPS investors give both MetroGas and Northern Orion five stars for their ownership of lucrative reserves in emerging markets, where costs to develop resources tends to be cheaper. The quest for gold has recently made Northern Orion a takeover target as well -- Yamana Gold (NYSE:AUY) wants to combine the resources of Northern Orion and Meridian into one entity, scaling and diversifying the company to compete with larger international miners.

Given the turmoil among U.S. airline stocks over the past several years, including the bankruptcy of UAL (NASDAQ:UAUA) and Delta, investors may not consider this sector ripe for growth. But in emerging markets in Latin America, airlines such as LAN are seeing rapid growth. The company has been operating profitably, and it earns a significant amount of its revenue -- 36% in the most recent quarter -- from hauling cargo. But the main growth areas for the airline lie in both domestic and long-haul passenger travel.

LAN is taking several steps to capture passenger growth trends in Latin America. The company is ramping up its fleet, including recent orders for 36 new planes from Boeing to handle domestic and international routes. In Chile, a new, low-cost approach to domestic travel, similar to what Southwest has done in the U.S., has helped LAN grow passenger traffic there by 30% in the most recent quarter. While some investors are concerned about rising debt levels, 38 out of 41 CAPS All-Star investors are bullish on LAN, voting for the stock to outperform the S&P going forward.

You can lead a horse to water ...
Plucking individual stocks participating in emerging markets such as Argentina or Chile is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation -- after all, even the best stock pickers can be horribly wrong on a stock.

Do you agree that mining and natural gas are some of the best plays in emerging markets? Or are foreign airlines a better play? Give your own opinion in Motley Fool CAPS.

The Motley Fool Global Gains service digs deep into emerging markets to help you find some of the greatest investment opportunities beyond our borders. Check out our new international investing service free for 30 days.

Fool contributor Dave Mock loves doing the teardown part -- it's the put-back-together part he hates. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy would rather build up than tear down.