Emerging markets have had powerful returns lately. But investing in up-and-coming areas of the world isn't exactly the safest game in town.
If you're looking to temper the risk of emerging market investing, the new PowerShares FTSE RAFI Emerging Markets ETF (AMEX:PXH) might be worth a closer look. The exchange-traded fund is based on the FTSE RAFI Emerging Index, which was designed to track the largest companies among the emerging markets, based on four fundamental measures of firm size: book value, cash flow, sales, and dividends. The idea is that sticking with large-cap companies adds a measure of safety to a risky area. With an average market cap for its components of nearly $59 billion, this index fits the bill.
As you'd expect, companies from places like Brazil, China, and South Korea account for a majority of this ETFs assets. Financials and telecom stocks make up half the portfolio, with energy and materials stocks also significant among its holdings. The fund's top stocks include Russian telecom firm Rostelecom (NYSE:ROS), Korean steelmaker POSCO (NYSE:PKX), and energy giant PetroChina (NYSE:PTR).
For the past few years, international markets have been outstanding performers. That's clearly attracting the attention of ETF sponsors. Yet it wasn't so long ago that emerging markets were known as submerging markets for their poor returns. There's no telling how long the bull run for these markets will last, but like all runs, this one will end someday.
Even if you're willing to take that risk, this fund might not be your best bet. The fund has a rich expense ratio of 0.85%, and there are less expensive options already in the market. As a new and untested fund, this PowerShares offering has no history to give an idea of how the fund might perform. Like all funds that invest in global markets, this fund has additional risks compared to a domestic-only strategy. Expenses should not be the only criteria for selecting a fund, but less costly alternatives like the iShares Emerging Markets Index Fund (NYSE:EEM) at 0.75% or Vanguard Emerging Markets ETF (AMEX: VWO) with its 0.35% expense ratio might be more attractive.
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